As filed with the Securities and Exchange Commission on
August 9, 2007

Registration
No. 333-

UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C.
20549

FORM SB-2

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

NITROSECURITY, INC.

(Name of small business issuer
in its charter)

Delaware

7372

20-2290085

(State or Jurisdiction of
Incorporation or Organization)

(Primary Standard Industrial
Classification Code Number)

(I.R.S. Employer
Identification No.)

230 Commerce Way,
Suite 325

Portsmouth, NH 03801

(603) 766-8160

(603) 766-8169
Facsimile

(Address and telephone number of
principal executive offices and principal place of
business)

Kenneth R. Levine

President and Chief Executive
Officer

NitroSecurity, Inc.

230 Commerce Way,
Suite 325

Portsmouth, NH 03801

(603) 766-8160

(603) 766-8169
Facsimile

(Name, address and telephone
number of agent for service)

Please send copies of all
communications to:

Philip P.
Rossetti, Esq.

Joel J.
Goldschmidt, Esq.

Wilmer Cutler Pickering Hale and
Dorr LLP

Morse, Zelnick, Rose &
Lander, LLP

60 State Street

405 Park Avenue,
Suite 1401

Boston, Massachusetts
02109

New York, New York
10022

(617) 526-6000

(212) 838-8269

(617) 526-5000
Facsimile

(212) 838-9190 Facsimile

Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.

If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o

If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o

If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o

If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o

CALCULATION OF REGISTRATION
FEE

Proposed Maximum

Title of Each Class of

Aggregate Offering

Amount of

Securities to be Registered

Price(1)

Registration Fee

Units, consisting of one share of
common stock, $0.01 par value, and one warrant to purchase
one share of common stock

$

20,125,000

(2)

$

617.84

Common stock included in the units





Warrants to purchase common stock
included in the units





Common stock underlying the
warrants included in the units(3)

$

30,187,500

(2)

$

926.76

Underwriters warrants



(4)

Units issuable upon exercise of the
underwriters warrants

$

2,100,000

$

64.47

Common stock included in the units
issuable upon exercise of the underwriters warrants(3)





Warrants to purchase common stock
included in the units issuable upon exercise of the
underwriters warrants





Common stock underlying the
warrants included in the units issuable upon exercise of the
underwriters warrants(3)

$

2,625,000

$

80.59

Total

$

55,037,500

$

1,689.66

(1)

Estimated solely for purposes of
calculating the amount of the registration fee paid pursuant to
Rule 457(o) under the Securities Act.

(2)

Includes the underwriters
over-allotment option.

(3)

Pursuant to Rule 416 under the
Securities Act, there are also being registered hereby such
additional indeterminate number of shares as may become issuable
pursuant to the antidilution provisions of the warrants.

(4)

No registration fee required
pursuant to Rule 457 of the Securities Act.

The Registrant hereby amends
this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933,
as amended, or until this Registration Statement shall become
effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.

The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.

(SUBJECT TO COMPLETION) DATED
AUGUST 9, 2007

PROSPECTUS

Units

each consisting of

one share of common stock and
one warrant

This is our initial public offering. We are
offering
units, each unit consisting of one share of common stock and one
redeemable warrant. Each warrant entitles its holder to purchase
one share of common stock at an exercise price equal to 150% of
the initial public offering price of the units. The warrants are
exercisable at any time after they become separately tradable,
which we expect will be 30 days after the date of this
prospectus, until their expiration date, five years after the
date of this prospectus. We may redeem some or all of the
warrants at a price of $0.25 per warrant at any time beginning
six months after the date of this prospectus at any time after
the closing price for our common stock on the NASDAQ Capital
Market has equaled or exceeded 200% of the initial public
offering price of the units for any five consecutive trading
days.

We anticipate that the initial public offering price of the
units will be between $ and
$ per unit.

Initially, only the units will trade. The common stock and the
warrants included in the units will begin trading separately on
the 30th calendar day following the date of this prospectus
or the first trading day thereafter if the 30th calendar
day is a weekend or holiday. Once separate trading in the common
stock and warrants begins, trading in the units will cease and
the units will be delisted.

We have applied to list the units, common stock and warrants on
the NASDAQ Capital Market under the symbols NITRU,
NITR and NITRW, respectively.

Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of the
disclosures in this prospectus. Any representation to the
contrary is a criminal offense.

Per Unit

Total

Public offering price

$

$

Underwriting discount

$

$

Proceeds to us, before expenses

$

$

We have also agreed to pay Paulson Investment Company, Inc., the
representative of the underwriters of this offering, a
nonaccountable expense allowance equal to 2% of the total public
offering price for
the units
offered by this prospectus and to issue to the underwriters
warrants covering an aggregate
of
units, identical to the units offered by this prospectus, having
an exercise price per unit equal to 120% of the initial public
offering price of the units.

We have also granted the underwriters a
45-day
option to purchase up to an
additional
units to cover over-allotments.

You should rely only on the information contained in this
document and any free writing prospectus prepared by us or on
our behalf or to which we have referred you. We have not
authorized anyone to provide you with any other information.
This document may only be used where it is legal to sell these
securities. The information in this document may only be
accurate on the date of this document.

This summary highlights information contained elsewhere in
this prospectus. You should read the following summary together
with the more detailed information appearing elsewhere in this
prospectus, including our financial statements and related notes
and the risk factors beginning on page 7, before deciding
whether to purchase our securities. Unless the context otherwise
requires, we use the terms NitroSecurity, our
company, we, us and
our in this prospectus to refer to NitroSecurity,
Inc. and its predecessor. Unless indicated to the contrary, all
information in this prospectus has been retroactively adjusted
to reflect a one-for-twenty reverse split of our common stock
and preferred stock that was effected on October 18, 2006
and the automatic conversion of all of our outstanding shares of
preferred stock into shares of our common stock upon the
effectiveness of the registration statement of which this
prospectus is a part.

Organizations are increasingly in need of solutions that
monitor, analyze and protect their networks from both internal
and external threats, with a goal of increasing network
availability and avoiding data loss. In addition, organizations
are seeking solutions to better protect and store increasing
amounts of network data to meet both their own internal
requirements and the increasing requirements of regulatory
compliance.

We sell our products to medium and large-size companies from a
broad range of industries and government agencies. We also sell
our products to managed service providers, who in turn provide
network security services to a similarly broad range of
customers and industries. Since January 1, 2005, we have
sold our products, either directly or through our partners, to
approximately 130 end-user customers.

Our total revenue increased by approximately $0.34 million,
or 83%, to $0.75 million in the three months ended
March 31, 2007 from $0.41 million in the three months
ended March 31, 2006. Our net loss was approximately
$10.4 million for the year ended December 31, 2006 and
$2.1 million for the three months ended March 31,
2007. As of March 31, 2007, we had cumulative net losses of
approximately $34.3 million.

Industry
Background

We compete in the intrusion prevention and network security
management markets. In recent years, these markets have had to
adapt to, among other things, an increased need for network
security by organizations of all sizes, increased amounts of
network data that must be analyzed and stored and increased
regulatory requirements regarding network security. Many
products have been developed in an attempt to collect and
process the massive amount of information generated by network
and security infrastructures, but most of these products are
limited in their capability to process both real-time and
forensic network and security data. Consequently, the intrusion
prevention and network security management markets are in need
of more advanced network security solutions that protect vital
information assets in real-time.

Our
Strategy

Our strategy is focused on both becoming a leading provider of
network security products and developing products to apply
NitroEDB to the broader data management market and the complex
event processing market. We intend to become a leading provider
of network security products by, among other things, maintaining
our technological leadership, increasing our original equipment
manufacturer, strategic partner and distribution channels,
expanding our customer base, expanding our relationships with
our customers, strengthening our presence outside of the United
States and expanding into other network security markets. We
also believe that the performance and scalability
characteristics of NitroEDB are well suited for solving complex
problems in many markets outside of intrusion prevention and
network security management. As a result, we are exploring
opportunities to apply NitroEDB to the broader data management
market and the complex event processing market.

Our business is subject to numerous risks and uncertainties, as
more fully described under Risk Factors beginning on
page 7, which you should carefully consider prior to
deciding whether to invest in our securities. For example:



we have had operating losses for several years, we expect to
continue to incur losses in the future and we may never reach or
maintain profitability;



we may require additional capital in the future to operate and
grow our business as planned, which may not be available to us
on favorable terms, or at all, and may dilute your ownership of
our common stock;



our independent registered public accounting firm has
substantial doubt about our ability to continue as a going
concern, which, if we were not able to do, would cause you to
lose your entire investment;



our prior independent registered public accounting firm
determined that material weaknesses exist relating to our
internal controls and procedures, which, if we are unable to
address and resolve, may result in our failure to meet reporting
requirements established by the Securities and Exchange
Commission;



we face intense competition in the intrusion prevention and
network security management markets, especially from larger,
better-known companies, and we may lack sufficient financial or
other resources to maintain or improve our competitive
position; and



our quarterly results of operations are likely to be
unpredictable, which could cause the trading price of our stock
to fluctuate.

Corporate
Information

We were incorporated in Minnesota on October 20, 1994 under
the name D.G.H. Limited and subsequently changed our name to
Go2Market.com Incorporated on December 1, 1999. On
February 18, 2005, we reincorporated in Delaware and
changed our name to NitroSecurity, Inc. Our principal executive
office is located at 230 Commerce Way, Suite 325,
Portsmouth, NH 03801 and our telephone number is
(603) 766-8160.
Our web address is www.nitrosecurity.com. The information
contained on our website or that can be accessed through our
website is not part of this prospectus, and investors should not
rely on that information in deciding whether to purchase the
units that we are offering.

NitroSecurity, NitroEDB,
NitroView, NitroGuard,
N-Tree, Any-Memory, the NitroSecurity
logo and our other trademarks or service marks appearing in this
prospectus are our property. This prospectus contains additional
trade names, trademarks and service marks that are the property
of other persons.

units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock.
Initially, only the units will trade. The common stock and the
warrants included in the units will begin trading separately on
the 30th calendar day following the date of this prospectus or
the first trading day thereafter if the 30th calendar day is a
weekend or holiday. Once separate trading in the common stock
and warrants begins, trading in the units will cease and the
units will be delisted.

Warrants

The warrants included in the units will be exercisable at any
time after they become separately tradable. The exercise price
of each warrant will be 150% of the initial public offering
price of the units. The warrants expire on the fifth anniversary
of the date of this prospectus, but if the warrants are not
exercisable at that time because a current registration
statement for the underlying shares is not available, then the
expiration date will be extended until 30 days following
notice from us that the warrants are again exercisable.
Nevertheless, there is a possibility that the warrants will
never be exercisable, when in-the-money or otherwise, and that
warrant holders will never receive shares or payment of cash in
settlement of the warrants. See Risk Factors 
If we do not maintain an effective registration statement or
comply with applicable state securities laws, you may not be
able to exercise the warrants for more details.

Redemption of warrants underlying units

We will have the right to redeem the warrants issued in this
offering at a redemption price of $0.25 per warrant at any time
beginning (i) six months after the date of this prospectus
and (ii) the date on which the closing price of our common
stock, as reported on the NASDAQ Capital Market, has equaled or
exceeded 200% of the initial public offering price of the units
for five consecutive trading days.

Shares of common stock to be outstanding after this offering

shares

Use of proceeds

We intend to use the net proceeds from this offering for the
expansion of our sales and marketing activities, research and
technology development, the repayment of indebtedness and other
general corporate purposes. We may use a portion of the proceeds
for the acquisition of, or investment in, companies,
technologies, products or assets that complement our business.
See Use of Proceeds for more information.

Risk factors

You should carefully read the Risk Factors section
and other information included in this prospectus for a
discussion of factors to consider before deciding to invest in
our securities.

The number of shares of our common stock to be outstanding after
this offering is based
on shares of our
common stock outstanding as
of ,
2007 and excludes:



2,582,326 shares of our common stock issuable upon exercise
of stock options outstanding as of June 30, 2007;



773,382 additional shares of our common stock reserved as of
June 30, 2007 for future issuance under our stock incentive
plans;



138,341 shares of our common stock issuable upon exercise
of warrants outstanding as of June 30, 2007;



shares
of our common stock issuable upon exercise of warrants included
in the units sold in this offering;



shares
of our common stock issuable upon exercise of the
underwriters warrants to purchase units; and



shares
of our common stock issuable upon exercise of the warrants
issuable upon exercise of the underwriters warrants to
purchase units.

Except as otherwise noted, all information contained in this
prospectus assumes the following:



a one-for-twenty reverse split of our common stock and preferred
stock that was effected on October 18, 2006;



the automatic conversion of all of our outstanding shares of
preferred stock
into shares
of our common stock upon the effectiveness of the registration
statement of which this prospectus is a part;



shares
to be issued as
of
in payment for the accrued dividends on our Series C
preferred stock at the time of their conversion into common
stock;



shares
to be issued as
of
in payment for the principal and accrued and unpaid interest on
our convertible promissory notes;



the filing of our restated certificate of incorporation and the
adoption of our amended and restated by-laws following the
effectiveness of the registration statement of which this
prospectus is a part; and



no exercise of the over-allotment option granted to the
underwriters to purchase up to an
additional
units.

Product and service billings, which is not a measure under
generally accepted accounting principles in the United States,
or GAAP, represents the amount invoiced for products that are
delivered and services that are to be delivered for which we
expect payment under our typical payment terms. We present the
product and service billings metric because we believe that it
provides a consistent basis for understanding our direct and
indirect sales activity over time. We use product and service
billings as a metric to assess our business performance.
Products are billed as delivered. Post-contract support, or PCS,
is billed at the start of the contract term.

This offering and an investment in our securities involves a
high degree of risk. You should carefully consider the risks
described below and the other information in this prospectus,
including our financial statements and related notes, before you
purchase any units. The risks and uncertainties described below
are not the only ones we face. Additional risks and
uncertainties not presently known to us, or that we currently
deem immaterial, could negatively impact our business, results
of operations or financial condition in the future. If any of
the following risks and uncertainties develop into actual
events, our business, results of operations or financial
condition could be adversely affected. In those cases, the
trading price of our securities could decline, and you may lose
all or part of your investment.

Risks
Related to Our Business

We
have had operating losses and negative cash flow from operating
activities for several years and expect to continue to incur
losses and negative cash flow. We may never reach or maintain
positive cash flow or profitability.

Our net loss was approximately $12.0 million for the year
ended December 31, 2005, $10.4 million for the year
ended December 31, 2006 and $2.1 million for the three
months ended March 31, 2007. As of March 31, 2007, we
had cumulative net losses of approximately $34.3 million
and a working capital deficit of approximately $3.5 million.

We expect to continue to incur operating losses for the
foreseeable future, and there can be no assurance that we will
ever achieve profitability. If we continue to experience
negative cash flow and operating losses, our ability to continue
as a going concern could be in substantial doubt. Becoming
profitable will depend in large part on our ability to generate
and sustain increased revenue levels in future periods and
manage our operational expenses properly. In addition, if our
new products and product enhancements fail to achieve adequate
market acceptance, our revenue may not grow as quickly as we
expect or may decline. We expect that our operating expenses
will continue to increase in the foreseeable future as we
(i) seek to expand our customer base, (ii) increase
our sales and marketing efforts, (iii) continue to invest
in research and development of our technologies and product
enhancements and (iv) incur significant new costs
associated with becoming a public reporting company. These
efforts may be more costly than we expect, and we can not assure
you that we can increase our revenue enough to offset our higher
operating expenses. If our revenue does not increase at a
greater rate than our expenses, we will not become and remain
profitable.

We may
require additional capital in the future to operate and grow our
business as planned, which may not be available to us on
favorable terms, or at all, and may dilute your ownership of our
common stock.

As of March 31, 2007, we had cash and cash equivalents of
approximately $0.5 million. In addition, as of
August 8, 2007, we had outstanding indebtedness in the
aggregate principal amount of approximately $5.0 million.
Even after the closing of this offering, we may require
additional capital from debt or equity financings in the future
to fund (i) the expansion of our sales and marketing
activities, (ii) research and technology development,
(iii) the repayment of some of our outstanding
indebtedness, (iv) other general corporate purposes, or
(v) potential acquisition or other investment
opportunities. We may not be able to secure timely additional
financing on favorable terms, or at all. The terms of any
additional financing may also place limits on our financial and
operating flexibility. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, if and when
we require it, our ability to grow or support our business and
to respond to business challenges could be significantly
limited. If we raise additional funds through further issuances
of equity, convertible debt securities or other securities
convertible into equity, our existing stockholders could suffer
significant dilution in their percentage ownership of our
company, and any new securities we issue could have rights,
preferences and privileges senior to those of holders of our
common stock, including shares of common stock sold in this
offering.

Our
independent registered public accounting firm has substantial
doubt about our ability to continue as a going concern. If we
cannot continue as a going concern, you could lose your entire
investment.

In its report related to our financial statements as of
December 31, 2006 and for the years ended December 31,
2006 and 2005, which are contained elsewhere in this prospectus,
our independent registered public accounting firm, Carlin,
Charron & Rosen, LLP, included an explanatory
paragraph stating that because we have suffered recurring losses
from operations, have a net capital deficiency and a net working
capital deficiency, there is substantial doubt about our ability
to continue as a going concern. If we cannot continue as a going
concern, it is likely that your entire investment will be lost.
Our ability to continue as a going concern will depend, in large
part, on our ability to obtain additional financing 
preferably from the sale of equity securities  to
fund future operations and to significantly increase our
revenue. However, we may not be able to secure timely additional
financings on favorable economic terms, or at all. This offering
is a principal element of our plan to move towards profitable
operations. Even if this offering is completed, if, in the
future, we are unable to achieve positive cash flow from
operating activities or secure additional financing as needed,
we may not be able to continue as a going concern and you could
lose your entire investment.

Our
prior independent registered public accounting firm determined
that material weaknesses existed related to our internal
controls and procedures. In the event we are unable to address
and resolve these material weaknesses, we may fail to meet
reporting requirements established by the Securities and
Exchange Commission.

On May 31, 2007, Vitale, Caturano & Company,
Ltd., our prior independent registered public accounting firm,
sent a letter to the audit committee of our board of directors
noting certain deficiencies in our internal controls that they
considered to be material weaknesses. Vitale,
Caturano & Company, Ltd. indicated that we did not
maintain adequate accounting and finance personnel, that our
accounting system required significant manual effort, that we
were unable to identify, assess and resolve accounting issues,
and that we lacked formal, documented procedures and controls
over transaction processing and financial reporting. Vitale,
Caturano & Company, Ltd. considered these material
weaknesses in determining the nature, timing and extent of the
audit tests that were applied to their audits. In connection
with their reaudit of our financial statements as of and for the
fiscal year ended December 31, 2004, including audit
procedures deemed necessary in their professional judgment
related to our January 1, 2004 opening balances, Vitale,
Caturano & Company, Ltd. noted that our previously
audited financial statements contained many errors, including
with respect to revenue recognition, capitalization of software
development costs, accounting for stock options, accrued
expenses and accounting for income taxes.

We are in the process of remediating the material weaknesses
identified above in order to help prevent and detect further
errors in the financial statement closing and reporting process.
After we received the letter from Vitale, Caturano &
Company, Ltd., the firm of Carlin, Charron & Rosen,
LLP reaudited our financial statements for the year ended
December 31, 2005. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Changes in Accountants. If these
measures are insufficient to address the issues raised, or if we
discover additional internal control deficiencies, we may fail
to meet reporting requirements established by the Securities and
Exchange Commission, or SEC, investors may lose confidence in us
and our financial statements may contain material misstatements
and require restatement and our business, results of operations
and financial condition may be harmed.

As a
result of becoming a public reporting company, we will be
obligated to develop and maintain proper and effective internal
controls over financial reporting, which will be burdensome and
costly. We may not complete our analysis of our internal
controls over financial reporting in a timely manner, or these
internal controls may not be determined to be effective, which
may adversely affect investor confidence in our company and, as
a result, the value of our common stock.

We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, as amended, and the rules and
regulations of the SEC thereunder, which we refer to as
Section 404, to furnish a report by management on, among
other things, the effectiveness of our internal controls over
financial reporting beginning with our Annual Report on
Form 10-K
for the year ending December 31, 2008. This assessment

will need to include disclosure of any material weaknesses
identified by management in our internal controls over financial
reporting, as well as a statement that our auditors have issued
an attestation report on managements assessment of our
internal controls.

We are just beginning the costly and challenging process of
compiling the system and processing documentation so that we
will be able to perform the evaluation needed to comply with
Section 404. We may not be able to complete our evaluation,
testing and any required remediation in a timely fashion. During
the evaluation and testing process, if we identify one or more
material weaknesses in our internal controls over financial
reporting, we will be unable to assert that our internal
controls are effective. If we are unable to assert that our
internal controls over financial reporting are effective, or if
our auditors are unable to attest that managements report
is fairly stated or they are unable to express an opinion on the
effectiveness of our internal controls, we could lose investor
confidence in the accuracy and completeness of our financial
reports, which would have a material adverse effect on the price
of our common stock. In addition, if we fail to achieve and
maintain the adequacy of our internal controls, it might make it
more difficult for us to obtain certain types of insurance,
including director and officer liability insurance, which could
impact our ability to retain or attract qualified people in
those capacities, and we might be forced to accept reduced
policy limits and coverage
and/or incur
substantially higher costs to obtain the same or similar
coverage.

We
face intense competition in the intrusion prevention and network
security management markets, especially from larger,
better-known companies, and we may lack sufficient financial or
other resources to maintain or improve our competitive
position.

The markets for intrusion prevention and network security
management solutions are extremely
competitive and we expect competition to continue in the future.
We cannot assure you that we will be able to compete
successfully against our current or potential competitors,
especially those with significantly greater financial resources
or brand name recognition.

Our chief competitors include manufacturers and software
developers that focus on intrusion detection and prevention,
security information and event management that are currently
selling products and services that compete with our products and
services. These competitors include ArcSight, Inc., 3Com
Corporation, Cisco Systems, Inc., IBM, Juniper Networks, Inc.,
LogLogic, Inc., McAfee, Inc., netForensics, Inc., Q1 Labs
Inc., Reflex Security, Inc., SenSage, Inc., Sourcefire, Inc.,
Symantec Corporation and Top Layer Networks, Inc. We also
compete with other companies that offer products that include
components or individual functions that compete with our
products and services. Many of our competitors have longer
operating histories, greater financial, marketing and technical
resources, greater brand recognition and larger customer bases
than we do. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer
requirements.

We face potential competition from network infrastructure
companies that could integrate functions or features similar to
our products into their own products, including 3Com, Cisco, EMC
Corporation, IBM and Juniper. In addition, we face potential
competition from companies that sell software products, such as
traditional firewall, anti-virus and other network security
solutions that have achieved market acceptance. These companies
may expand their product offerings to include other devices and
software that compete directly with our products. These
companies would have a marketing advantage over us because of
their installed customer base.

Competition in the intrusion prevention and network security
management markets may intensify as a result of mergers and
consolidations. For example, over the past three years, each of
3Com, Cisco, IBM, McAfee, Juniper and Symantec have acquired
smaller companies with products and service offerings that are
competitive to ours. As a result of these transactions, our
competitors now have greater financial, marketing and technical
resources than we do. These acquisitions could make the combined
entities potentially stronger competitors to us if their
products and offerings are effectively integrated.

Our
quarterly results of operations are likely to be unpredictable,
which could cause the trading price of our stock to
fluctuate.

Our results of operations have historically been difficult to
predict from period to period, and we expect that they will
continue to be so as a result of a number of factors, most of
which are outside of our control, including, but not limited to:



the budgeting cycles, internal approval requirements and funding
available to our existing and prospective customers for the
purchase of network security products;



the fiscal years of our customers;



the timing, size and contract terms of orders received;



the product mix of our sales;



the timing of revenue recognition for our sales;



the announcement or introduction of new product offerings by us
or our competitors, and the levels of anticipation and market
acceptance of those products;



price competition;



the general level of perceived threats to network
security; and



general economic conditions, both domestically and in our
foreign markets.

Our prospective customers usually exercise great care and invest
substantial time in their network security purchasing decisions.
Many of our customers have historically finalized purchase
decisions in the last weeks or days of a quarter. Although many
of our customers have fiscal years ending on December 31,
like we do, others have fiscal years that end at other times.
For instance, the U.S. federal governments fiscal
year ends on September 30, which could result in higher
revenue for our third quarter, as compared to other quarters. A
delay in one large order beyond the end of a particular quarter
can substantially diminish our anticipated revenue for that
quarter. In addition, many of our expenses must be incurred
before we generate revenue.

The cumulative effect of these factors will likely result in
fluctuations and unpredictability in our quarterly results of
operations, which may result in our failure to meet the revenue
or results of operations expectations of securities or industry
analysts or investors for any period. If we fail to meet such
expectations for these or any other reasons, the market price of
our shares could decrease substantially. Therefore, you should
not rely on our results of operations in any quarter as being
indicative of our results of operations for any future period,
nor should you rely on other expectations, predictions or
projections of our future revenue or other aspects of our
results of operations.

Our
ability to sell to the U.S. federal government and its agencies
is subject to uncertainties that could have a material adverse
effect on our growth prospects and results of operations. Our
contracts with the U.S. federal government contain certain
provisions that may be unfavorable to us.

The U.S. federal government and its agencies accounted for
approximately 7% of our billings during the year ended
December 31, 2006 and 13% of our billings for the three
months ended March 31, 2007. Our ability to sell products
to the U.S. federal government and its agencies is subject
to uncertainties related to the U.S. federal
governments policies and funding priorities and
commitments as well as our ability to maintain compliance with
applicable U.S. federal government regulations and other
requirements. Any difficulties complying with U.S. federal
government regulations, or changes in U.S. federal
government regulations, policies or priorities, including
funding levels through agency or program budget reductions by
the U.S. Congress or government agencies, could harm our
ability to sell products to the U.S. federal government,
causing fluctuations in our revenue from these contracts from
period to period and resulting in a weakening of our business,
results of operations and financial condition.

The majority of our sales to the U.S. federal government
and its agencies are performed through partners with whom we
maintain contractual relationships for the resale of our
products and services. Our contracts

with these partners subject us to certain risks and give the
U.S. federal government and its agencies rights and
remedies not typically found in commercial contracts, including
rights that allow the U.S. federal government and its
agencies to:



terminate orders for convenience at any time and for any reason;



perform routine audits; and



control or prohibit the export of certain of our products.

If the U.S. federal government decides to exercise any of
these rights or remedies, it could have a materially adverse
effect on our business, financial condition and results of
operations.

The
market for network security products is rapidly evolving and the
complex technology incorporated in our products makes them
difficult to develop. If we do not accurately predict, prepare
for and respond promptly to technological and market
developments and changing customer needs and preferences, our
competitive position and business prospects will be
harmed.

The market for network security products is relatively new and
is evolving rapidly. Moreover, many of our customers rely on
internal networks, which require them to add numerous network
access points and incorporate a variety of hardware, software
applications, operating systems and network protocols. In
addition, computer hackers and others who try to attack networks
employ increasingly sophisticated new techniques to gain access
to and attack systems and networks. Customers look to our
products to continue to protect their networks against these
threats in this increasingly complex environment without
sacrificing network efficiency or causing significant network
downtime.

The software in our products is especially complex because it
needs to effectively identify and respond to new and
increasingly sophisticated methods of attack, while not impeding
network performance. We attempt to identify new security
vulnerabilities and prevent specific attacks through our Threat
Analysis Center, but we cannot guarantee that we will always be
successful in identifying and blocking attacks before they cause
damage to our customers networks or businesses. If we do
not quickly respond to the rapidly changing and rigorous needs
of our customers by developing and introducing on a timely basis
new and effective products, upgrades and services that can
respond adequately to new security threats, our competitive
position and business prospects will be harmed and the market
price of our common stock could decline.

If our
new products and product enhancements do not achieve sufficient
market acceptance, our results of operations and competitive
position will suffer.

We spend substantial amounts of time and money on research and
development activities to develop new products and enhance
current versions of our existing products to incorporate
additional features and improved functionality in order to meet
our customers rapidly evolving demands for network
security. In addition, when we develop a new product or an
enhanced version of an existing product, we typically expend
significant money and effort to market and promote the offering
before it generates any revenue. Therefore, a new or enhanced
product must achieve a high level of market acceptance in order
to justify our investment in developing and bringing it to
market.

Our new products or enhancements could fail to attain sufficient
market acceptance for many reasons, including:



disruptions or delays in the availability and delivery of our
products;



defects, errors or failures in our products;



inability of our products to interoperate with the networks of
our customers;



inability of our products to protect against new types of
attacks or techniques used by hackers; and



negative publicity about the performance or effectiveness of any
of our products.

If our new products or enhancements do not achieve adequate
acceptance in the market, our competitive position will be
impaired, our revenue will not grow and the effect on our
results of operations may be particularly acute because of the
significant research, development, marketing, sales and other
expenses we incurred in connection with the new product.

If we
are unable to protect our intellectual property rights, our
competitive position could be harmed and we could be required to
incur significant expenses to enforce our rights.

Our success depends, in part, on obtaining, maintaining and
enforcing our intellectual property and other proprietary
rights. We rely on a combination of trade secret, patent,
copyright and trademark laws and contractual provisions with
employees and third parties, all of which offer only limited
protection. Despite our efforts to protect our intellectual
property and proprietary information, we may not be successful
in doing so. As of June 30, 2007, we had one issued patent
and three pending patent applications. The patent issued for our
NitroEDB indexing technology is of particular importance to our
business because it is the underlying technology for our
NitroGuard IPS and NitroView products. We cannot be certain that
our pending patent applications will result in the issuance of
patents or whether the examination process will require us to
narrow our claims. Even though the NitroEDB technology patent
has already been issued to us and others might be issued in the
future, they may be contested, or our competitors may be able to
develop similar or superior technologies without infringing our
patents.

Although we enter into confidentiality, assignment of
proprietary rights and license agreements, as appropriate, with
our employees and third parties, including our contract
manufacturing firms, and generally control access to and
distribution of our technologies, documentation and other
proprietary information, we cannot be certain that the steps we
take to prevent unauthorized use of our intellectual property
rights are sufficient to prevent their misappropriation,
particularly in foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as
fully as in the United States.

Even in those instances where we have determined that another
party is breaching our intellectual property and other
proprietary rights, enforcing our legal rights with respect to
such breach may be expensive and difficult. We may need to
engage in litigation to enforce or defend our intellectual
property and other proprietary rights, which could result in
substantial costs and diversion of management resources.
Further, many of our current and potential competitors have the
ability to dedicate substantially greater resources to defending
any claims by us that they have breached our intellectual
property rights.

Claims
that we infringe or otherwise misuse the intellectual property
of others could subject us to significant liability and disrupt
our business, which could have a material adverse effect on our
business, results of operations and financial
condition.

Our competitors protect their intellectual property rights by
means such as trade secrets, patents, copyrights and trademarks.
We have not conducted an independent review of patents issued to
third parties. Although we have not been involved in any
litigation related to intellectual property rights of others, we
may in the future be sued for violations of other parties
intellectual property rights, and the risk of such a lawsuit
will likely increase as our size and the number and scope of our
products increase, as our geographic presence and market share
expand and as the number of competitors in our market increases.
Any such claims or litigation could:



be time-consuming and expensive to defend, whether meritorious
or not;



cause shipment delays;



divert the attention of our technical and managerial resources;



require us to enter into royalty or licensing agreements with
third parties, which may not be available on terms that we deem
acceptable, or at all;



prevent us from operating all or a portion of our business or
force us to redesign our products, which could be difficult and
expensive and may degrade the performance of our products;

subject us to significant liability for damages or result in
significant settlement payments; and/or



require us to indemnify our customers, partners or suppliers.

Any of the foregoing could disrupt our business and have a
material adverse effect on our business, results of operations
and financial condition.

Marketing
to most of our target customers involves long sales and
implementation cycles, which may cause our revenue and results
of operations to vary significantly.

We market our products primarily to medium and large-size
companies, academic institutions and government agencies. A
prospective customers decision to purchase our products
will often involve a significant commitment of its resources and
a lengthy evaluation and product qualification process.
Throughout the sales cycle, we anticipate often spending
considerable time educating and providing information to
prospective customers regarding the use and benefits of our
products. Budget constraints, budget cycles and the need for
multiple approvals within these organizations may also delay the
purchase decision. Failure to obtain the required approval for a
particular project or purchase decision on a timely basis may
delay the purchase of our products. As a result, we believe that
the sales cycle for our network security solutions typically is
90 to 180 days; however, the sales cycle for government
entities can be even longer and more unpredictable due to the
governments complex procurement processes. These long
cycles may cause delays in any potential sale, and we may spend
a large amount of time and resources on prospective customers
who decide not to purchase our line of products and services,
which could have a material adverse effect on our business,
results of operations and financial condition.

Even after making the decision to purchase our products, our
customers may not deploy our products broadly within their
networks. We expect the timing of implementation to vary widely,
depending on the complexity of the customers network
environment, the size of the network deployment, budget
constraints, the skill set of the customer and the degree of
hardware and software configuration necessary to deploy our
products.

Our
growth strategy contemplates strengthening our presence outside
the United States, increasingly subjecting us to the risks of
operating internationally, which could adversely impact our
business, results of operations and financial
condition.

We currently market and sell our products in North America,
South America and Europe and intend to expand our partner
relationships in these and other parts of the world. Customers
located outside of the United States accounted for approximately
5% of our total billings in the year ended December 31,
2005, approximately 8% of our total billings in the year ended
December 31, 2006 and none of our billings in the three
months ended March 31, 2007. International operations
involve numerous risks, including:



foreign currency exchange rate fluctuations;



economic or political instability in foreign markets;



greater difficulty in accounts receivable collection;



difficulties and costs of managing foreign operations;



import and export controls;



the uncertainty of protection for intellectual property rights
in some countries;



costs of compliance with foreign laws and laws applicable to
companies doing business in foreign jurisdictions;



management communication and integration problems resulting from
cultural differences and geographic dispersion; and

To date, all of our international sales have been through
partners. Our partners currently bear the risks associated with
fluctuations in foreign currency exchange rates, and thus we
have not had to use risk management techniques or
hedge the risks associated with such fluctuations.
In the future, if our sales are denominated in currencies other
than the U.S. dollar and if we do not engage in hedging
transactions, our results of operations will be subject to
losses from fluctuations in foreign currency exchange rates.

Defects,
errors or vulnerabilities in our products would harm our
reputation, divert resources and cause us to lose
revenue.

Because our products are complex, they may contain defects,
errors or vulnerabilities that are not detected until after our
commercial release and installation by our customers. We may not
be able to correct any errors or defects or address
vulnerabilities promptly, or at all. Any defects, errors or
vulnerabilities in our products could result in:



expenditure of significant financial and product development
resources in order to analyze, correct, eliminate or work around
errors or defects or to address and eliminate vulnerabilities;

In late 2005, our intrusion prevention system began experiencing
increased failure rates as it was installed in larger and more
complex customer networks. Accordingly, we instituted a
temporary freeze on product shipments from January 2006 to March
2006 in order to allow us to determine the causes or cause of
these failures and correct the problem. We cannot guarantee that
we will not need to institute similar freezes in the future if
our products do not perform as anticipated.

In addition, because our products provide and monitor network
security and may protect valuable information, we could face
claims for product liability, tort or breach of warranty. Anyone
who circumvents our security measures could misappropriate the
confidential information or other valuable property of customers
using our products, or interrupt their operations. If that
happens, affected customers or others may sue us. In addition,
we may face liability for breaches of our product warranties,
product failures or damages caused by faulty installation of our
products. Provisions in our contracts relating to warranty
disclaimers and liability limitations may be unenforceable.
Defending a lawsuit, regardless of its merit, could be costly
and divert managements attention from operations. Our
business liability insurance coverage may be inadequate and
future coverage may be unavailable on acceptable terms, or at
all.

Our
networks, products and services may be targeted by
hackers.

Like other companies, our website, networks, information
systems, products and services may be targets for sabotage,
disruption or misappropriation by hackers. As a network security
company, we are a high profile target. We cannot guarantee that
our networks, products and services will not be targeted by
hackers or that we can and will be able to prevent those
attacks. If those attacks are successful, our operations,
reputation and sales could be adversely affected.

If our
products do not interoperate with our customers networks,
installations could be delayed or even cancelled, which would
harm our business.

Our products are designed to interface with our customers
existing networks, each of which have different specifications
and utilize multiple technologies from other vendors. Many of
our customers networks contain multiple generations of
products that have been added over time as these networks have
grown and evolved. Our products must interoperate with the
products within these networks as well as future products in

order to meet our customers requirements. If we find
errors in the existing software used in our customers
networks, we must modify our software to correct or overcome
these errors so that our products will interoperate with the
existing software and hardware. If our products do not
interoperate with those of our customers networks,
installations could be delayed, orders for our products could be
cancelled or our products could be returned. Any delays or
cancellations would damage our reputation and could seriously
harm our business and prospects.

If we
are unable to acquire key components or are unable to acquire
them on favorable terms, we may not be able to deliver products
to our customers and our business will suffer.

The network interface cards used in our products are currently
only available from a limited number of sources. Changing our
primary supplier of these cards could result in a delay in
shipping finished goods and may impact our research and
development schedule. In addition, our primary supplier of these
network interface cards may also supply our competitors. We
cannot be certain that our suppliers will be able to meet our
demand for these and other components in a timely and
cost-effective manner. We expect to carry minimal inventory of
some of our products and product components, and we rely on our
suppliers to deliver necessary components to our contract
manufacturers in a timely manner based upon forecasts we provide.

Furthermore, we do not require significant quantities of the
components because we only sell a limited number of products
each year. Our low-quantity needs may not generate substantial
revenue for our suppliers. Therefore, it may be difficult for us
to continue our relationships with our current suppliers or
establish relationships with additional suppliers on
commercially reasonable terms, or at all. If we are unable to
buy these components on a timely and a cost-efficient basis, we
may not be able to deliver products to our customers or be price
competitive, which would negatively impact future revenue and,
in turn, seriously harm our business.

Our
reliance on third parties to manufacture and assemble our
products could cause a delay in our ability to fill orders,
which might cause us to lose sales.

We currently use third parties to manufacture and assemble our
products. If we cannot continue our arrangements with our
contract manufacturers on terms acceptable to us, we may not be
able to produce and ship our products, and our business will
suffer. If we fail to manage our relationships with our contract
manufacturers effectively, or if they experience delays,
disruptions or quality control problems in their manufacturing
operations, our ability to ship products could be delayed.

The absence of dedicated capacity with our contract
manufacturers means that, with limited notice, they could refuse
to continue manufacturing some or all of our products.
Qualifying new contract manufacturers and commencing volume
production would be expensive and time-consuming. If we are
required or choose to change contract manufacturers, we could
lose revenue and damage our customer relationships.

Our reliance on third-party manufacturers also exposes us to the
following risks that are outside our control:



unexpected increases in manufacturing costs;



interruptions in shipments if one of our manufacturers is unable
to complete production;



inability to control delivery schedules;



unpredictability of manufacturing yields; and



inability of a manufacturer to maintain the financial strength
to meet our procurement and manufacturing needs.

We
depend on reseller and distributor partners for our sales. If
they fail to perform as expected, our revenue could
decline.

Part of our business strategy involves entering into additional
agreements with reseller and distributor partners that permit
them to sell our products and services. Billings resulting from
our partners accounted for approximately 58% of our total
billings in the year ended December 31, 2005, approximately
47% of our total billings in the year ended December 31,
2006 and approximately 27% of our total billings in the three
months ended March 31, 2007. In order to grow our business,
we need to expand our relationships with existing partners and
add new partners. We cannot assure you that our existing
reseller and distributor agreements will produce as much
business as we anticipate or that we will be able to enter into
agreements with additional partners on acceptable terms, or at
all. Also, some or all of our partners may be acquired, may
decide not to sell our products any longer or may go out of
business, any of which could have an adverse effect on our
business.

Competition
for our employees is intense, and we may not be able to attract
and retain the highly skilled employees that we need to support
our business.

Our future depends, in part, on our ability to attract and
retain key personnel, including our current executive officers
and other key technical personnel, each of whom would be
difficult to replace. During 2006 and 2007, we spent a
significant amount of time conducting searches for a new chief
financial officer, chief technology officer and other key
employees. Competition for highly skilled personnel, whether
administrative, sales and marketing or technical, is extremely
intense and we continue to face difficulty identifying and
hiring qualified personnel in these areas of our business. We
may not be able to hire and retain such personnel at
compensation levels consistent with our existing compensation
and salary structure. Many of the companies with which we
compete for hiring experienced employees have greater resources
than we have and may be able to offer more attractive terms of
employment. In addition, we invest significant time and expense
in training our employees, which increases their value to
competitors who may seek to recruit them. If we fail to retain
our employees, we could incur significant expenses replacing
them and the quality of our products and services and our
ability to provide such products and services could diminish,
resulting in a material adverse affect our business.

Our
inability to effectively manage our expected growth and our
additional obligations as a public reporting company could
seriously harm our ability to effectively run our
business.

Our intended future growth is likely to place a significant
strain on our management, financial personnel and other
resources. In addition to managing our expected growth, we will
have substantial additional obligations and costs as a result of
being a public reporting company. These obligations include
investor relations, preparing and filing periodic reports with
the SEC, developing and maintaining internal controls over
financial reporting and disclosure controls, compliance with
corporate governance rules, Regulation FD and other
requirements imposed on public companies by the SEC and NASDAQ.
Fulfilling these additional obligations will make it more
difficult to operate a growing company. Any failure to
effectively manage growth or fulfill our obligations as a public
reporting company could seriously harm our ability to respond to
customers, the quality of our software and services and our
results of operations. To effectively manage growth and operate
a public reporting company, we will need to implement additional
management information systems, improve our operating,
administrative, financial and accounting systems and controls,
train new employees and maintain close coordination among our
executive, engineering, accounting, finance, marketing, sales
and operations organizations.

We may
undertake future acquisitions that could disrupt our business,
cause dilution to our stockholders and harm our business,
results of operations or financial condition.

While we currently have no acquisitions of other businesses
pending or planned, we may pursue acquisition opportunities in
the future. We have very little experience consummating
acquisitions, and therefore our ability to make acquisitions is
unproven. We may not be able to find suitable acquisition
candidates and we may not be able to complete acquisitions on
favorable terms, or at all. If we do complete acquisitions, we

cannot assure you that the acquisitions will strengthen our
competitive position or that such acquisitions will be viewed
positively by customers, financial markets or investors. In
addition, any acquisitions that we make could lead to
difficulties in integrating personnel and operations from the
acquired businesses and in retaining and motivating key
personnel from such businesses. Acquisitions may disrupt our
ongoing operations, divert management from day-to-day
responsibilities, increase our expenses or adversely impact our
business, results of operations and financial condition. Future
acquisitions may reduce our cash available for operations and
other uses and could result in an increase in amortization
expense related to identifiable assets acquired, potentially
dilutive issuances of equity securities or the incurrence of
debt, which could harm our business, results of operations and
financial condition.

Risks
Related to this Offering

If an
active market does not develop for our securities, you may not
be able to sell them when you want. In addition, the price of
our securities may be subject to wide fluctuations and may trade
below the initial public offering price.

Before this offering, there has not been a public market for our
securities, and we cannot assure you that an active trading
market for the units, common stock or warrants will develop or
that the market price of the units, or the aggregate price of
the common stock and warrants after the units delist, will not
decline below the initial public offering price of the units. As
a result, you may not be able to sell our securities quickly or
at prices equal to or greater than the price you paid in this
offering. The initial unit public offering price will be
determined by negotiations between us and the representative of
the underwriters based on numerous factors, including those that
we discuss in the section of this prospectus captioned
Underwriting. This price may not be indicative of
the market price of our securities after this offering. The
market price of our securities also could be subject to
significant fluctuations.

Among the factors that could affect the market price for the
units, common stock and warrants, many of which are beyond our
control, are the risks described in this Risk
Factors section and the following:



quarterly variations in our results of operations;



inability to meet revenue, net income or other operational
targets set by us or securities or industry analysts;



changes in expectations as to our future financial performance,
including financial estimates or reports by securities or
industry analysts;



changes in market valuations of similar companies;



liquidity and activity in the market for our securities;



actual or expected sales of our securities by our
securityholders;



strategic moves by us or our competitors, such as acquisitions
or restructurings;



general market
and/or
economic conditions; and



domestic and international economic, legal and regulatory
factors unrelated to our performance.

Stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of a
particular company. These broad market fluctuations may
adversely affect the trading price of the units, common stock
and warrants, regardless of our operating performance.

We are
controlled by a limited number of stockholders, which will limit
your ability to influence the outcome of key decisions and could
adversely impact the price of our securities.

Immediately after this offering, our executive officers and
directors will, in the aggregate, beneficially
own % of the issued and outstanding
shares of our common stock, or % if
the over-allotment option is exercised in full. In addition, our
two largest stockholders, Brookline Venture Partners I, LLC
and First

Analysis Corporation, will own %
and %, respectively, immediately after
this offering,
or %
and %, respectively, if the
over-allotment option is exercised in full. As a result,
Brookline Venture Partners I, LLC and First Analysis
Corporation will have the ability to exercise substantial
control over our affairs and corporate actions requiring
stockholder approval, including electing and removing directors,
selling all or substantially all of our assets, merging with
another entity or amending our certificate of incorporation.
Moreover, Brookline Venture Partners I, LLC and First
Analysis Corporation could delay, deter or prevent a change in
control even if a transaction of that sort would benefit the
other stockholders. In addition, concentration of ownership
could adversely affect the price that investors might be willing
to pay in the future for our securities.

Future
sales or the potential for sale of a substantial number of
shares of our common stock could cause the trading price of our
common stock and warrants to decline and could impair our
ability to raise capital through subsequent equity
offerings.

Sales of a substantial number of shares of our common stock in
the public markets, or the perception that these sales may
occur, could cause the market price of our common stock to
decline and could materially impair our ability to raise capital
through the sale of additional equity securities. Once this
offering is completed and the units are de-listed, we will
have shares
of common stock issued and outstanding and will have reserved
approximately an
additional shares
of common stock for future issuance as follows:



2,582,326 shares of our common stock issuable upon exercise
of stock options outstanding as of June 30, 2007;



773,382 additional shares of our common stock reserved as of
June 30, 2007 for future issuance under our stock incentive
plans;



138,341 shares of our common stock issuable upon exercise
of warrants outstanding as of June 30, 2007;



shares
of our common stock issuable upon exercise of warrants included
in the units sold in this offering;



shares
of our common stock issuable upon exercise of the
underwriters warrants to purchase units;



shares
of our common stock issuable upon exercise of the warrants
issuable upon exercise of the underwriters warrants to
purchase units; and



shares
of our common stock issuable upon exercise of the over-allotment
option granted to the underwriter, including the shares
underlying the warrants included in the units underlying that
option.

The common stock included in the units sold in this offering, as
well as the common stock underlying the warrants, other than
those shares held by affiliates, as defined by the
rules and regulations promulgated under the Securities Act of
1933, as amended, which we refer to as the Securities Act, will
be freely tradable without restriction. Upon the expiration of
the one-year
lock-up
agreements to be signed by our officers and directors, persons
owning more than 5% of our common stock and certain other
stockholders,
approximately
unregistered shares will be saleable without restriction under
Rule 144(k) promulgated under the Securities Act and
another unregistered
shares will be saleable subject to the timing and volume
limitations set forth in Rule 144(d) promulgated under the
Securities Act. Approximately shares will
become saleable under Rule 144 six months after the date of
this prospectus. In addition, in connection with this
offering, shares
of our common stock that are subject to outstanding options will
vest in full and become eligible for sale in the public market.

Purchasers
in this offering will experience immediate and substantial
dilution in net tangible book value.

The imputed initial public offering price of our common stock in
this offering, without attributing any portion of the initial
unit offering price to the warrant, is substantially higher than
the pro forma net tangible book value per share of our
outstanding common stock
at ,
2007. Investors purchasing units in this offering will incur
immediate dilution of $ per share,
or %, based on an imputed initial
public offering price of $ per
share. As a result of this dilution, investors purchasing units
from us will have contributed % of
the total amount invested in us, but will own
only % of our outstanding common
stock. In addition, the exercise of outstanding options and
warrants and future equity issuances may result in further
dilution to investors and current stockholders.

The
existence of outstanding warrants and options may impair our
ability to obtain additional equity financing.

The existence of outstanding warrants and options may adversely
affect the terms at which we could obtain additional equity
financing. The holders of these warrants and options have the
opportunity to profit from a rise in the value or market price
of our common stock and to exercise them at a time when we could
obtain equity capital on more favorable terms than those
contained in these securities. Accordingly, any exercise of
these warrants or options would likely be dilutive to existing
stockholders.

If we
do not maintain an effective registration statement or comply
with applicable state securities laws, you may not be able to
exercise the warrants issued in this offering.

For you to be able to exercise the warrants issued in this
offering, the shares of our common stock to be issued to you
upon exercise of the warrants must be covered by an effective
and current registration statement and qualify or be exempt
under the securities laws of the state or other jurisdiction in
which you live. We cannot assure you that we will continue to
maintain a current registration statement relating to the shares
of our common stock underlying the warrants. If the warrants are
not exercisable at their expiration date, the expiration date
will be extended for 30 days following notice to the
holders of the warrants that the warrants are again exercisable.
If you cannot exercise the warrants, and the securities
underlying the warrants are listed on a securities exchange or
there are three independent market makers for the underlying
securities, we may, but are not required to, settle the warrants
for a price equal to the difference between the closing price of
the underlying securities and the exercise price of the
warrants. Consequently, there is a possibility that you will
never be able to exercise the warrants and that you will never
receive shares or payment of cash in settlement of the warrants,
which could have an adverse effect on demand for the warrants
and their market price.

The
warrants issued in this offering may be redeemed on short
notice, which may have an adverse impact on their
price.

We may redeem the warrants issued in this offering for $0.25 per
warrant at any time after the specific redemption conditions of
the respective warrants have been satisfied. If we give notice
of redemption, you will be forced to sell or exercise your
warrants or accept the redemption price. The notice of
redemption could come at a time when it is not advisable or
possible for you to exercise the warrants or a current
prospectus or exemption from registration or qualification does
not exist. As a result, you would be unable to benefit from
owning the warrants being redeemed.

If
securities or industry analysts do not publish research or
publish unfavorable research about our business, the price and
trading volume of our securities could decline.

The trading market for our securities could depend in part on
any research reports that securities or industry analysts
publish about us or our business. After this offering, if no
securities or industry analysts initiate coverage of our
company, the trading price for our stock may be negatively
impacted. In the event securities or industry analysts cover our
company and one or more of these analysts downgrade our
securities or publish unfavorable reports about our business,
the price of our securities would likely decline. In addition,
if any securities or industry analysts cease coverage of our
company or fail to publish reports on us regularly,

demand for our securities could decrease, which could cause the
price and trading volume of our securities to decline.

Anti-takeover
provisions under Delaware law and in our restated certificate of
incorporation and amended and restated by-laws could discourage,
delay or prevent a change in control of our company and may
affect the trading price of our securities.

We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change in control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated by-laws may
discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
restated certificate of incorporation and amended and restated
by-laws that will become effective following the effectiveness
of the registration statement of which this prospectus is a part:



authorize the issuance of blank check preferred
stock that could be issued by our board of directors to prevent
a takeover attempt;



establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election;



require that directors only be removed from office for cause and
only upon a supermajority stockholder vote;



provide that vacancies on the board of directors, including
newly created directorships, may be filled only by a majority
vote of directors then in office;



limit who may call special meetings of stockholders;



prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of stockholders; and

For more information regarding these and other provisions, see
the section titled Description of Securities 
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and By-Laws.

If we
issue shares of preferred stock, your investment could be
diluted or subordinated to the rights of the holders of
preferred stock and the price of our securities could be
adversely impacted.

Our board of directors will be authorized by our restated
certificate of incorporation, which will become effective
following the effectiveness of the registration statement of
which this prospectus is a part, to establish classes or series
of preferred stock and fix the designation, powers, preferences
and rights of the shares of each such class or series without
any further vote or action by our stockholders. Any shares of
preferred stock so issued could have priority over our common
stock with respect to dividend or liquidation rights. Any such
action by our board of directors or issuance of preferred stock
by us could dilute your investment in our securities or
subordinate your holdings to the shares of preferred stock.

Management
has broad discretion over the use of proceeds from this
offering. We may use the proceeds of this offering in ways that
do not improve our results of operations or the market value of
our securities.

We will have broad discretion in determining the specific uses
of the proceeds from the sale of the units. While we have
general expectations as to the allocation of the net proceeds of
this offering, that allocation may change in response to a
variety of unanticipated events, such as differences between our
expected and

actual revenue from operations or availability of commercial
financing opportunities, unexpected expenses or expense overruns
or unanticipated opportunities requiring cash expenditures. We
will also have significant flexibility as to the timing and the
use of the proceeds. As a result, investors will not have the
opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the
proceeds. You will rely on the judgment of our management with
only limited information about their specific intentions
regarding the use of proceeds. We may spend most of the proceeds
of this offering in ways with which you may not agree. If we
fail to apply these funds effectively, our business, results of
operations and financial condition may be materially and
adversely affected.

We do
not anticipate paying dividends in the foreseeable future. This
could make our stock less attractive to potential
investors.

We anticipate that we will retain all future earnings and other
cash resources for the future operation and development of our
business, and we do not intend to declare or pay any cash
dividends in the foreseeable future. Future payment of cash
dividends will be at the discretion of our board of directors
after taking into account many factors, including our results of
operations, financial condition and capital requirements.
Corporations that pay dividends may be viewed as a better
investment than corporations that do not.

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties relating to future events or
our future financial performance. These statements involve known
and unknown risks, uncertainties and other factors that may
cause the actual results to differ materially from those
expressed or implied by such forward-looking statements. Factors
that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include,
but are not limited, to statements concerning:



the anticipated benefits and risks associated with our new
products and product enhancements;

Furthermore, in some cases, you can identify forward-looking
statements by terminology such as may,
could, should, expect,
plan, intend, anticipate,
believe, estimate, predict,
potential or continue, the negative of
such terms or other comparable terminology. These statements are
only predictions. In evaluating these statements, you should
specifically consider various factors, including the risks
outlined in the Risk Factors section. These factors
may cause our actual results to differ materially from any
forward-looking statement.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.

We estimate that we will receive net proceeds from this offering
of approximately $ million, based on an assumed
initial public offering price of $
per unit, which is the midpoint of the price range set forth on
the cover of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters exercise their
option to purchase additional shares, we estimate that we will
receive an additional
$ million in net proceeds.

A $1.00 increase (decrease) in the assumed initial public
offering price of $ per unit would
increase (decrease) the net proceeds to us from this offering by
$ million, assuming the
number of units offered by us, as set forth on the cover of this
prospectus, remains the same.

We generally expect to use the net proceeds of this offering as
follows:

Amount

Percentage

Sales and marketing

$

%

Research and technology development

$

%

Repayment of indebtedness

$

%

Other general corporate purposes

$

%

Total:

$

100%

Sales and marketing includes the estimated cost of additional
sales and marketing personnel to address domestic and
international markets for both our current products and our
strategic initiatives. Sales and marketing also includes the
estimated cost of expanding our relationships with domestic and
international partners.

Research and technology development includes internal and
outsourced research and development projects, salaries and wages
of associated engineering staff.

We will repay a portion of our outstanding indebtedness out of
the proceeds of this offering. The indebtedness to be repaid
consists of convertible promissory notes that we issued on
July 31, 2007. An aggregate principal amount of $2,000,000
is currently outstanding under the notes, which bear interest at
8% per year. These notes, including the accrued interest, will
become due upon the closing of this offering.

Other general corporate purposes consist of general and
administrative costs, including salaries, accounting and legal
fees, rent and other facilities expenses, costs associated with
being a public company and maintaining internal controls over
financial reporting and other working capital requirements.

Management will retain broad discretion with respect to the use
of the net proceeds of this offering and allocations set forth
above. The amounts and timing of these expenditures will vary
depending on a number of factors, including the amount of cash
generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business.

In addition, we may use a portion of the proceeds for the
acquisition of, or investment in, companies, technologies,
products or assets that complement our business. However, we
have no present understandings, commitments or agreements to
enter into any acquisitions or make any investments. We cannot
assure you that we will make any acquisitions or investments in
the future.

Some of the principal purposes of this offering are to create a
public market for our common stock, increase our visibility in
the marketplace, provide liquidity to existing stockholders and
obtain additional working capital. We believe that a public
market for our common stock may facilitate future access to
public equity markets and enhance our ability to use our common
stock as a means of attracting and retaining key employees.

Pending specific utilization of the net proceeds as described
above, we intend to invest the net proceeds of the offering in
short-term investment grade and U.S. government securities.

The following table sets forth our capitalization as of
March 31, 2007:



on an actual basis;



on a pro forma basis to reflect (1) the automatic
conversion of all of our outstanding shares of preferred stock
into shares of our common stock upon the effectiveness of the
registration statement of which this prospectus is a
part and (2) the receipt of an aggregate of
$2.0 million of proceeds received under a three-year
secured debt facility that we entered into on July 31,
2007; and



on a pro forma as adjusted basis to reflect (1) the
automatic conversion of all of our outstanding shares of
preferred stock into shares of our common stock upon the
effectiveness of the registration statement of which this
prospectus is a part, (2) the receipt of an aggregate of
$2.0 million of proceeds received under the three year debt
facility that we entered into on July 31, 2007 and
(3) the filing of our restated certificate of incorporation
following the effectiveness of the registration statement of
which this prospectus is a part and (4) our issuance and
sale
of
units in this offering at an assumed initial public offering
price of $ per unit, the mid-point
of the estimated price range shown on the cover page of this
prospectus, after deducting the estimated underwriting discount
and offering expenses payable by us.

You should read this table together with our financial
statements and the related notes appearing at the end of this
prospectus and the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section of this prospectus.

A $1.00 increase (decrease) in the assumed initial public
offering price of $ per unit would
increase (decrease) each of additional paid in capital and total
stockholders equity in the pro forma as adjusted column by
$ million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discount and offering expenses payable
by us.

The table above reflects:



a one-for-twenty reverse split of our common stock and preferred
stock that was effected on October 18, 2006;



shares
to be issued as
of
in payment for accrued dividends on our Series C preferred
stock at the time of their conversion into common stock; and



shares
to be issued as of in
payment for principal and accrued and unpaid interest on our
convertible promissory notes.

The table above does not reflect:



the exercise of the over-allotment option granted to the
underwriters to purchase up to an
additional
units in this offering.



2,784,610 shares of our common stock issuable upon exercise
of stock options outstanding as of March 31, 2007;



571,098 additional shares of our common stock reserved as
of March 31, 2007 for future issuance under our stock
incentive plans;



138,341 shares of our common stock issuable upon exercise
of warrants outstanding as of March 31, 2007;



shares
of our common stock issuable upon exercise of warrants included
in the units sold in this offering;



shares
of our common stock issuable upon exercise of the
underwriters warrants to purchase units; and



shares
of our common stock issuable upon exercise of the warrants
issuable upon exercise of the underwriters warrants to
purchase units.

We have never declared or paid any dividends on our common stock
and we do not intend to pay any dividends in the foreseeable
future. We intend to retain any future earnings for use in the
operation and expansion of our business. Any future decision to
pay dividends on common stock will be at the discretion of our
board of directors and will be dependent upon our financial
condition, results of operations, capital requirements and other
factors that our board of directors may deem relevant.

If you purchase units in this offering, your interest will be
diluted to the extent of the excess of the initial public
offering price per share of common stock over the as adjusted
pro forma net tangible book value per share of common stock
after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by
the amount of our total liabilities, divided by the total number
of shares of common stock outstanding. For purposes of the
dilution computation and the following tables, we have allocated
the full purchase price of a unit to the share of common stock
included in the unit and none to the warrants.

At ,
2007, we had a negative pro forma net tangible book value of
approximately $ million, or
approximately
$( )
per share based
on shares
issued and outstanding on a pro forma basis. After taking into
account the estimated net proceeds from this offering of
$ million, our net tangible
book value
at ,
2007 would have been approximately
$ million, or
$ per share. This represents an
immediate increase of $ per share
to existing stockholders and immediate dilution of
$ per share,
or %, to the new investors who
purchase units in this offering. The following table illustrates
this per share dilution:

Assumed initial public offering
price per share of common stock

$

Pro forma net tangible book value
per share
at ,
2007

$

(

)

Increase in pro forma net tangible
book value per share attributable to new investors

Adjusted pro forma net tangible
book value per share after the offering

Dilution per share to new investors

$

The following table summarizes as
of ,
2007 the differences between the existing stockholders and the
new investors with respect to the number of shares purchased,
the total consideration paid and the average price per share
paid:

Average

Shares Purchased

Total Consideration

Price Per

Number

Percent

Amount

Percent

Share

Executive officers and directors(1)

(2)

%

$

%

$

Other existing stockholders

(2)



New investors

$

(3)

Total

(4)

100.0

%

$

100.0

%

(1)

Includes shares owned
by .

(2)

Includes shares
of common stock issuable upon conversion of our preferred stock
and convertible debt on the date of this prospectus.

(3)

Based on an initial public offering price of
$ per unit.

(4)

Does not include any shares underlying unexercised warrants and
options.

If the underwriters exercise the over-allotment option in full,
the new investors will
purchase
units. In that event, the gross proceeds from this offering will
be $ , representing
approximately % of the total
consideration for % of the total
number of shares of common stock outstanding, and the dilution
to new investors would be $ per
share, or %.

To the extent any options or warrants outstanding as of the
closing of this offering that have an exercise price of less
than $ per share are exercised,
you will experience further dilution.

You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with our financial statements and related notes appearing
elsewhere in this prospectus. In addition to historical
information, this discussion contains forward-looking statements
based on our current expectations that involve risks,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of various factors, including those set
forth in the Risk Factors section and elsewhere in
this prospectus.

Overview

We provide hardware and software products for security
monitoring, analysis and protection of computer networks. Our
products deliver comprehensive network intrusion prevention,
detailed security monitoring and regulatory compliance reporting
designed to improve network and operational efficiencies. Our
products also enable information technology professionals to
protect their networks by providing them with the capability to
view and analyze the real-time and historical relationships
between network traffic flow and security event data with an
interactive, graphical user interface and to automatically block
harmful or unwanted traffic that could adversely affect their
networks.

We design our products around our proprietary data management
technology, NitroEDB. We believe that our technology delivers
improved performance and scalability compared to existing data
management technologies, which gives us an advantage in the
intrusion prevention and network security management markets.
NitroEDB uses patented technology to deliver real-time query
results on extremely large databases, including those exceeding
billions of records. Our technology often enables our products
to deliver faster response times for applications that require
time sensitive processing of large volumes of data.

The core developers of NitroEDB, including Howard D. Stewart,
our Executive Vice President of Engineering and a director,
joined us in 1999. These developers brought with them the base
technology that was then commercialized into NitroEDB. We have
initially applied NitroEDB to address the increasing data
requirements of the intrusion prevention and network security
management markets with our NitroGuard Intrusion Prevention
System (IPS) and our NitroView family of products for security
data management. We also intend to apply NitroEDB to
opportunities in other markets that need to analyze large
amounts of data in real-time.

The indexing technology underlying NitroEDB is protected by a
patent that was granted in November 2002. In addition to three
other patent applications filed as of June 30, 2007, all of
which relate to the methodology and functionality of NitroEDB,
we protect and develop our intangible assets and proprietary
position by relying on trademarks, copyrights, trade secrets,
know-how and continuing technological innovation.

We market our products primarily to medium and large-size
companies, academic institutions and government agencies. We
generally view medium-size companies as those with revenue
between $100 million and $750 million and large-size
companies as those with revenue greater than $750 million.

Our customers cover multiple industries, including financial
services, healthcare, retail and hospitality industries,
academic institutions and federal, state and local governments
and agencies. We sell our solutions through a combination of
direct and indirect channels, including distributors, resellers,
integrators and technology partners. Our direct sales teams
consist of a regional sales director, a senior security engineer
and an inside sales representative. We also have managed
security service and channel partners in the United States, a
partner based in the United Kingdom that sells and supports our
products in Europe and an affiliate of one of our
U.S.-based
partners that sells and supports our products in Mexico.

Our supply chain strategy relies on outsourced manufacturing,
logistics and supply chain services led by our operations team.
We perform many customer support activities ourselves, which
provides us with valuable customer feedback after each sale.

Our revenue consists of product and service revenue from sales
through direct and indirect channels, including distributors,
resellers, integrators and technology partners.

Product Revenue. Our product revenue primarily
consists of sales of hardware embedded with the software that we
develop. The hardware is manufactured by a third party under a
manufacturing services and supply chain outsourcing arrangement.
During fiscal 2006, product revenue consisted primarily of sales
of our NitroGuard IPS products.

Service Revenue. Our service revenue primarily
consists of maintenance, telephone and web-based support,
software updates and rights to software upgrades on a
when-and-if-available
basis (commonly referred to as post-contract customer support,
or PCS). The PCS period is typically 12, 24 or 36 months.
Service revenue also includes professional services in the form
of consulting, installation and training. During fiscal 2006,
service revenue consisted primarily of PCS.

Product
and Service Billings

Product and service billings, which is not a measure used under
GAAP, represents the amount invoiced for products that are
delivered and services that are to be delivered for which we
expect payment under our typical payment terms. We present the
product and service billings metric because we believe that it
provides a consistent basis for understanding our direct and
indirect sales activity over time. We use product and service
billings as a metric to assess our business performance.
Products are typically billed as delivered. PCS is typically
billed at the start of the contract term.

Deferred
Revenue.

All amounts billed in excess of the revenue recognized are
included in deferred revenue. We classify deferred revenue that
we expect to recognize during the next twelve months as current
deferred revenue and the remainder as long-term deferred revenue
on our balance sheet. To recognize revenue from current solution
shipments, which are multiple element arrangements, we must
establish vendor specific objective evidence, or VSOE, of fair
value for each element of our sales arrangements. The best
objective evidence of fair value would be to sell each element
of our solutions separately to multiple customers for the same
price. Because of the continuously evolving nature of our
solutions during fiscal 2005 and 2006, there was not sufficient
VSOE of fair value for each element of our sales arrangements.
As a result, we defer revenue at the time of shipment and
recognize revenue ratably over the PCS period.

Deferred product cost consists of the cost of the embedded
software plus the hardware appliance product procured from a
third party and our overhead related to that product. As we have
not established VSOE for revenue recognition related to our
multiple element arrangements, the associated product cost is
deferred to match cost with revenue. Deferred product cost is
classified as current or long-term to correlate with the
deferred revenue classification.

commissions payable to our sales personnel (which we expense at
the time they are earned, which is typically when the associated
product and service billings are recorded);



tradeshow and industry conference costs;



travel and other out-of-pocket expenses;



marketing program expenses; and



other related overhead costs.

Research and Development. Research and
development expense consists primarily of:



salaries, benefits and share-based compensation related to our
engineers, who are primarily located at our Idaho facility;



cost of prototypes relating to the development of new products
and the enhancement of existing products;



payments to outsourced engineering providers for design services;



costs associated with our Idaho engineering facility; and



other related overhead costs.

We have expensed research and development costs as they have
been incurred. We intend to continue to invest significantly in
our research and development efforts with respect to both new
products and enhancements to current products in order to
maintain our competitive position.

General and Administrative. General and
administrative expense consists primarily of:

We expect general and administrative expense to increase as we
invest in infrastructure to support continued growth and incur
additional expenses related to being a publicly traded company,
including additional audit and legal fees, costs of compliance
with Section 404, additional administrative personnel,
disclosure obligations, investor relations expenses and
insurance premiums.

Critical
Accounting Policies and Estimates

We have no subsidiaries and do not own or control, directly or
indirectly, any shares of capital stock of any other corporation
or any interest in any partnership, joint venture,
variable-interest entity or any other non-corporate business
enterprise and, as such, have not consolidated any other
entities. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue
and expense during the reporting period. Actual results could
differ from those estimates.

Our critical accounting policies and estimates include the areas
of revenue recognition, share-based compensation and income
taxes.

Revenue
Recognition

Our typical sales arrangements involve multiple elements,
including hardware appliances, embedded software that is more
than incidental to the product as a whole, post-contract
services such as maintenance and technical support, and
professional services such as training.

We recognize revenue pursuant to Statement of Position, or SOP,
No. 97-2,
Software Revenue Recognition, and related guidance.
Product revenue in the statements of operations included
elsewhere in this prospectus consists primarily of sales of
hardware products embedded with software. Service revenue
consists primarily of PCS. Service revenue also includes
professional services in the form of consulting, installation
and training.

In general, for each arrangement, we record revenue when all of
the following conditions are met: (a) persuasive evidence
of an arrangement exists; (b) delivery of the product has
occurred and there are no remaining obligations or substantive
customer acceptance provisions; (c) the fee is fixed or
determinable; and (d) collection of the fee is probable.

To recognize revenue from current product and related service
shipments, which are multiple element arrangements, we must
establish VSOE of fair value for each element of our multiple
element sales arrangements. The best objective evidence of fair
value would be to sell each element of our solutions separately
to multiple customers for the same price. Because of the
continuously evolving nature of our solutions during fiscal 2005
and 2006, there was not sufficient VSOE of fair value for each
element of our sales arrangements. As a result, we defer revenue
at the time of solution shipment and recognize revenue ratably
over the PCS period, which is typically 12, 24 or 36 months.

Revenue derived from professional services, which are not
generally sold as part of multiple element arrangements, is
typically recognized upon the performance of the service. All
amounts billed in excess of the revenue recognized are included
in deferred revenue. We recognize service revenue using
SOP No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, and other relevant
guidance.

Share-Based
Compensation

Prior to January 1, 2006, employee stock awards under our
equity compensation plans were accounted for in accordance with
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations, rather than the alternative fair value
of accounting allowed by Statement of Financial Accounting
Standards, or SFAS, No. 123, Accounting for
Stock-Based Compensation. APB Opinion No. 25 provides
that the compensation cost of our employee stock options is
measured based on the intrinsic value of the stock option on the
date compensation is measured, which is generally the grant
date.

We adopted the disclosure-only provisions of
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of SFAS No. 123.

Using the minimum value method permissible under the provisions
of SFAS No. 123, our net loss for fiscal 2005 would
have been:

Reported net loss

$

(12,024,357

)

Add: Share-based employee
compensation included in reported net loss

191,767

Deduct: Total share-based employee
compensation expense determined under the
fair value-based method for all awards

(270,978

)

Pro forma net loss

$

(12,103,568

)

In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123R, Share Based
Payment, a revision of SFAS No. 123, which
requires companies to expense the fair value of employee options
and other forms of share-based payment arrangements. We adopted
SFAS No. 123R effective January 1, 2006.
SFAS No. 123R requires non-public companies that used
the minimum value method under SFAS No. 123 for pro
forma disclosures to apply SFAS No. 123R using the
prospective-transition method, which we adopted for all existing
share-based payment arrangements. In accordance with
SFAS No. 123R, we recognize the compensation cost of
employee stock-based awards granted subsequent to
December 31, 2005 in our statement of operations on a
straight line basis over the estimated service period of the
award. We use the Black-Scholes option pricing model to
determine the fair value of stock options granted.

We used the following process to develop assumptions for the
Black-Scholes pricing model during fiscal 2006, since there was
no public market for our common stock prior to this offering,
and therefore a lack of company-specific historical and implied
volatility data and a lack of company-specific information on
common stock value: We determined the share price volatility for
options granted based on an analysis of reported data for a peer
group of companies that granted options with substantially
similar terms. The expected volatility used to determine the
fair value of stock options granted in 2006 was 73.54%. The
expected term of options granted was determined using our
historical experience and expectations for future expected term.
The expected term of the options granted during 2006 was
6.25 years. The weighted average risk free interest rate
used for 2006 was 4.70%, based on a seven-year treasury
instrument whose term is consistent with the expected term of
the options. As we have not and do not plan to issue dividends
on our common stock, the expected dividend yield was zero.

SFAS No. 123R also requires companies to utilize an
estimated forfeiture rate when calculating the compensation cost
for the period, whereas SFAS No. 123 permitted
companies to record forfeitures based on actual forfeitures,
which was our historical policy. Based on a review of our
historical forfeitures since 1999, we applied an estimated
forfeiture rate of 5% and 21% for our executive and
non-executive employees, respectively, for fiscal 2006 in
determining the cost recorded in our statement of operations.

The following table summarizes our stock option grants between
January 1, 2005 and July 31, 2007:

Fair Value of

Shares Granted

Exercise Price ($)

Common Stock ($)

January 1 
December 31, 2005

273,219

0.60

(1)

0.60

January 1 
December 31, 2006

20,363

0.40

0.60

2,274,000

0.60

0.60

January 1 
March 31, 2007

21,750

0.60

0.85

75,000

0.85

0.85

April 1  July 31,
2007

695,235

0.93

0.93

(1)

Reflects the offer to reprice that we made to all of our option
holders as of October 6, 2006 who held stock options with
exercise prices higher than $0.60 per share. Prior to this
repricing, all of the stock options granted during 2005 had
exercise prices equal to $3.00.

Prior to this offering, there was no public market for our
common stock. Our board of directors determined the fair value
of our common stock, with input from management and after review
of the recommendations contained in a Practice Aid of the
American Institute of Certified Public Accountants titled
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, or the AICPA Practice Aid. The
board of directors exercised judgment in determining the
estimated fair value of our common stock on the date of grant
based on several objective and subjective factors, including
operating and financial performance and corporate milestones,
private placements of our preferred stock, liquidation
preferences, conversion features, dividend rights, market values
of comparable publicly traded companies, market values of
comparable companies recently acquired, the early stage nature
of our company and the likelihood of achieving a liquidity event
such as an initial public offering or sale of our company.

As of January 1, 2007, we engaged Mirus Capital Advisors,
or Mirus, solely to produce a valuation analysis of our common
stock as of January 1, 2007, for the purposes of satisfying
the requirements of Section 409A of the Internal Revenue
Code of 1986, as amended, which we refer to as
Section 409A. Mirus employed three distinct valuations
approaches: the market approach, the income approach and the
asset-based approach. The market approach consisted of three
methods: comparable public companies, comparable merger and
acquisition transactions, and company-specific approach. The
income approach employed discounted cash flow techniques. The
asset-based approach considered the recovery value of tangible
assets in a liquidation scenario. These three approaches were
used to derive the total value of our equity. Total equity value
was subsequently allocated to the different tiers of equity
based on the option method to derive the value of the common
stock. Based on this analysis, Mirus estimated that for the
purposes of satisfying the requirements of Section 409A,
the value per share of our common stock as of January 1,
2007 was $0.85. This valuation was considered by our board of
directors along with input from management and relevant
objective and subjective factors, which were deemed appropriate
by the board in determining the fair value of our common stock
as $0.85 for the period from January 1, 2007 to
March 31, 2007.

We engaged Mirus to update their valuation analysis of our
common stock as of July 1, 2007. Mirus employed the same
methodology discussed above, using updated information,
including, but not limited to, our interim 2007 financial
results, progress against operational milestones, market value
of publicly traded comparable companies and market value of
recently acquired comparable companies. Based on their valuation
analysis, Mirus estimated that the value per share of our common
stock as of July 1, 2007 was $0.93.

As indicated in the table above, the increases in fair value of
our common stock from fiscal 2006 to fiscal 2007 and during
fiscal 2007 are due to objective factors, including changes in
the market values of comparable publicly traded companies and
publicly available values of comparable acquired companies, and
subjective factors, including the market acceptance of our
products and the increasing likelihood of achieving a liquidity
event, such as an initial public offering.

We recorded compensation cost of $0.23 million in fiscal
2006 and $0.16 million in the three months ended
March 31, 2007 in connection with share-based awards. As of
April 1, 2007, we expect to recognize future compensation
cost for unvested stock options of $0.83 million over an
estimated period of 1.6 years.

Income
Taxes

Deferred tax assets and liabilities are determined based on the
future effect of the temporary differences between the carrying
amounts for financial statement purposes and the income tax
basis of assets and liabilities. These deferred amounts are
measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The future effect
on deferred taxes of a change in tax rates or laws is adjusted
for on the date of the enactment. No net deferred tax assets
were reported for fiscal 2005 or 2006, as valuation allowances
were recorded reflecting managements determination of the
uncertainty of realizing the research and development tax
credits and net operating loss carry-forwards and as explained
further in the financial statements included elsewhere in this
prospectus.

Total revenue increased by approximately $0.34 million, or
83%, to $0.75 million in the three months ended
March 31, 2007 from $0.41 million in the three months
ended March 31, 2006. The 114% growth in product revenue
was primarily the result of the introduction of our NitroView
products, as well as continued market acceptance of our
NitroGuard IPS products. In addition, service revenue grew by
75% primarily due to an increase in PCS.

Cost of
Revenue

Cost of revenue decreased $0.1 million, or 40%, to
$0.2 million in the three months ended March 31, 2007
from $0.3 million in the three months ended March 31,
2006, despite an increase in revenue of 83% for the same period.
This improvement was primarily due to the reduction of initial
product introduction costs, material costs and outsourced
service costs.

Gross
Profit

Gross profit increased to $0.6 million in the three months
ended March 31, 2007 from $0.14 million in the three
months ended March 31, 2006. Gross profit as a percentage
of total revenue increased to 79% from 34% in the first quarter
of 2007. This increase was primarily due to the reduction of
initial product introduction costs, material costs and
outsourced service costs.

Operating
Expenses

Three Months Ended

Period-to-Period

March 31,

Change

2006

2007

Amount

Percentage

(In thousands)

Sales and marketing

$

1,619

$

1,240

$

(379

)

(23

)%

Research and development

826

622

(204

)

(25

)%

General and administrative

433

424

(11

)

(3

)%

Total

$

2,878

$

2,286

$

(592

)

(21

)%

Sales and Marketing and General and
Administrative. During fiscal 2006, we reduced
spending on sales and marketing and general and administrative
employees and programs to align better with our forecasted sales
levels for fiscal 2006. These expense reductions had been fully
implemented by January 1, 2007, resulting in a 23%
reduction in sales and marketing expense for the three months
ended March 31, 2007, compared with the three months ended
March 31, 2006. General and administrative expenses
decreased by 3% over the same period, despite an 83% increase in
revenue, as the reduction in employees was fully implemented by
January 1, 2007.

Research and Development. The reduction of 25%
in research and development expense for the three months ended
March 31, 2007, compared with the three months ended
March 31, 2006, resulted from the expense reductions made
during fiscal 2006 that were fully implemented by
January 1, 2007.

Net interest income decreased $0.3 million to
$0.4 million in the three months ended March 31, 2007
from $0.7 million in the three months ended March 31,
2006. This decrease was primarily attributable to the beneficial
conversion feature in the convertible promissory notes issued in
July 2005. The conversion feature in the notes was triggered in
January 2006 when we issued our Series C preferred stock.
The notes are convertible into shares of Series C preferred
stock at a 15% discount to the Series C preferred stock
conversion price of $1.40. The total discount, $510,026, was
recorded as interest expense in the first quarter of 2006.

Comparison
of Fiscal 2005 and Fiscal 2006

Revenue
and Product and Service Billings

Period-to-Period

Fiscal

Change

2005

2006

Amount

Percentage

(In thousands)

Reconciliation

Revenue

$

1,829

$

2,353

$

524

29

%

Less: Royalty revenue

633

0

(633

)

Product and Service Revenue

1,196

2,353

1,157

97

%

Deferred revenue, at end of period

1,577

1,744

167

Less: Deferred revenue, at
beginning of period

(186

)

(1,577

)

(1,391

)

Product and service billings

$

2,587

$

2,520

$

(67

)

(3

)%

Total revenue increased by approximately $0.5 million, or
29%, to $2.4 million in fiscal 2006 from $1.8 million
in fiscal 2005.

Product and service revenue increased by approximately
$1.2 million, or 97%, to $2.4 million in fiscal 2006
from $1.2 million in fiscal 2005. Product revenue increased
by $0.8 million, or 114%, to $1.4 million in fiscal
2006 from $0.6 million in fiscal 2005. This growth was
primarily the result of market acceptance of our NitroGuard
products, which were released during 2005 and enhanced during
2006. Service revenue increased by $0.4 million, or 75%, to
$0.9 million in fiscal 2006 from $0.5 million in
fiscal 2005, primarily due to an increase in revenue from
maintenance contracts and renewals.

We generated $0.6 million in royalty revenue in fiscal 2005
from a single customer. We did not generate any revenue from
this customer in fiscal 2006 or in the three months ended
March 31, 2007.

During fiscal 2006, no single customer represented more than 10%
of our revenue.

Cost of
Revenue

Cost of revenue decreased by $0.3 million, or 24%, to
$0.8 million in fiscal 2006 from $1.1 million in
fiscal 2005, despite an increase in total revenue of 29% over
the same period. This improvement was primarily the result of
the reduction of initial product introduction costs, material
costs and personnel costs through the elimination of redundant
positions.

Gross
Profit

Gross profit increased by $0.8 million, or 99%, to
$1.6 million in fiscal 2006 from $0.8 million in
fiscal 2005. Gross profit as a percent of total revenue
increased to 67% in fiscal 2006 from 43% in fiscal 2005. This
improvement during fiscal 2006 primarily resulted from our
efforts to reduce cost of revenue and our reducing the discounts
that we had been giving customers on our NitroGuard products as
those products gained increased market acceptance.

Sales and Marketing. During fiscal 2006, we
reduced spending on sales and marketing employees and programs
to align better with our forecasted sales levels for fiscal
2006. As a result, we experienced a 34% decrease in sales and
marketing expense from $8.2 million in fiscal 2005 to
$5.4 million in fiscal 2006. Nonetheless, our sales and
marketing expense was 228% of revenue due to our need to
increase our market presence. We intend to continue to make
significant investment in sales and marketing as our products
gain market acceptance.

Research and Development. The 26% increase in
research and development expense from $2.7 million in
fiscal 2005 to $3.4 million in fiscal 2006 was due
primarily to hiring additional engineering employees and
expanding our outsourced engineering programs to access
complementary technologies and to accelerate our product
releases. Our fiscal 2006 investment in research and development
was 146% of revenue due to our need to expand our product
offerings. We intend to continue to make significant investment
in research and development.

General and Administrative. The 14% decrease
in general and administrative expense from $1.7 million in
fiscal 2005 to $1.5 million in fiscal 2006 was due
primarily to reducing the number of our general and
administrative personnel. We expect our general and
administrative expense to increase as we invest in
infrastructure to support continued growth and incur additional
expenses related to being a publicly traded company, including
additional audit and legal fees, costs of compliance with
Section 404, additional administrative personnel,
disclosure obligations, investor relations expenses and
insurance premiums.

Interest
Expense, Net

Interest expense increased by $1.5 million to
$1.7 million in fiscal 2006 from $0.2 million in
fiscal 2005. Interest expense associated with interest-bearing
debt actually decreased to $22,000 in fiscal 2006 from $212,000
in fiscal 2005, as we financed our fiscal 2006 operations
primarily with the proceeds from the sale of our Series C
preferred stock. Accretion of interest associated with this
Series C preferred stock, combined with interest associated
with the beneficial conversion feature of the convertible notes
issued in July 2005, contributed to the increase in net interest
expense.

Liquidity
and Capital Resources

As of April 1, 2007, our principal sources of liquidity
were cash and cash equivalents of $0.5 million.

From our inception through March 31, 2007, we have not
generated positive cash flow from operating activities. We have
funded our business primarily through issuances of three series
of preferred stock and borrowings under convertible promissory
notes. Upon the effectiveness of the registration statement of
which

this prospectus is a part, all outstanding shares of preferred
stock will automatically convert into shares of our common
stock. An analysis of cash flow is presented below:

Three Months Ended

Fiscal Year

March 31,

2005

2006

2006

2007

Cash and cash equivalents

$

31,421

$

186,665

$

2,802,977

$

498,577

Investments, short-term









Investments, long-term









Accounts receivable

579,780

558,957

359,947

545,317

Working capital

(6,151,168

)

(2,145,120

)

(1,657,402

)

(3,457,139

)

Cash flow from operating activities

(9,679,968

)

(8,635,866

)

(3,182,859

)

(675,889

)

Cash flow from investing activities

(1,220,854

)

(42,501

)

(14,633

)



Cash flow from financing activities

10,147,737

8,833,611

5,969,048

987,801

Cash flow from operating activities, which includes customer
collections, are derived principally from product and service
billings, rather than recognized revenues. We believe that cash
flow from operating activities is a useful measure of the
performance of our business because, in contrast to income
statement profitability metrics that rely principally on
revenue, cash flow from operating activities captures the
changes in deferred revenue from period to period.

While cash flow from operating activities was negative during
the periods presented in the table above, management believes
that it is important to track our progress toward the goal of
achieving positive cash flow from operating activities. We
expect to reduce the deficit in cash flow from operating
activities in fiscal 2007 relative to the deficit in fiscal
2006. During the three months ended March 31, 2007, we
reduced the deficit in cash flow from operating activities by
83% relative to the three months ended March 31, 2006.

At the point, if any, when we experience positive cash flow from
operating activities, we expect that cash flow from operating
activities will be one of the key metrics that we will report on
a quarterly basis to track our continued progress. In addition
to using this metric to track business performance, management
believes that this metric is frequently used by securities
analysts, investors and other interested parties in the
evaluation of software companies with significant deferred
revenue balances.

We believe that our existing cash and cash equivalents,
three-year debt facility and the net proceeds of this offering
will be sufficient to meet our anticipated cash needs for at
least the next twelve months, although there is no assurance
that such proceeds will be sufficient for this purpose. We
expect to use approximately
$ million of the net proceeds
of this offering to repay outstanding principal and interest
under convertible promissory notes that will become due upon the
closing of this offering. Our future working capital
requirements will depend on many factors including, but not
limited to, the rate of our product and service billings growth,
the market acceptance of our existing products and any of our
new and enhanced products, the rate of expansion of our sales
teams and partner programs, the rate of expansion of our
engineering team, the rate of progress on our systems and
process upgrades for public company compliance, the costs of
being a public reporting company and the rate of our investment
in infrastructure to support our growth.

We entered into a three-year debt facility in July 2007 to
borrow up to an aggregate principal amount of $2.0 million.
As of August 8, 2007, we had borrowed the full
$2.0 million under the facility. The principal balance and
interest will be repaid over 36 months through July 2010.
Our intention is to use the proceeds of this facility for
working capital and other operating needs prior to the
availability of the net proceeds of this offering.

We expect to continue to experience negative cash flow from
operating activities for the near term. If we continue to incur
negative cash flow from operating activities for longer than
expected, our ability to continue as a going concern could be in
substantial doubt. To the extent that our cash and cash
equivalents, three-year debt facility and the net proceeds of
this offering are insufficient to fund our future activities, we
may be required to raise additional funds through working
capital debt facilities or public or private equity or debt
financings. We also may need to raise additional financing
should the execution of our business strategy not

develop as planned and we do not achieve positive cash flow from
operating activities, or should we acquire one or more
companies, technologies or assets. In any of these events, we
cannot assure you that we will be able to secure such financings
on acceptable terms, or at all.

Contractual
Obligations and Commitments

The following table discloses information about our contractual
obligations and the periods in which payments are due as of
December 31, 2006:

Payments Due by Period

Less Than

1-3

3-5

More Than

Total

1 Year

Years

Years

5 Years

Capital Leases

$

54,935

$

42,008

$

12,927





Operating Leases

378,921

171,686

207,235





Total

$

433,856

$

213,694

$

220,162





The capital leases primarily relate to office equipment. The
operating leases primarily relate to our office facilities in
Portsmouth, New Hampshire, Idaho Falls, Idaho and Reston,
Virginia. No purchase contracts or non-cancelable supply
commitments were in place as of December 31, 2006.

Off-Balance
Sheet Arrangements

We do not engage in off-balance sheet financing arrangements. We
have no interest in entities referred to as variable interest
entities, which include special purpose entities and other
structured finance entities.

Quantitative
and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. We do not hold or issue financial instruments
for trading purposes. Our market risk is primarily a result of
fluctuations in interest rates. We do not currently have any
interest rate hedges.

Our international sales are primarily through partners and our
sales to those partners are primarily in U.S. dollars. As a
result, our foreign currency exchange rate risk is limited
because our partners primarily bear the direct risk of foreign
currency exchange rates for our sales outside of the United
States.

We do not enter into investments for trading or speculative
purposes.

Our cash and cash equivalents are subject to interest rate risk,
which will affect the interest income we derive. Due to the
short-term nature of these investments, we believe that we do
not have material exposure to changes in the fair value of our
cash or cash equivalents as a result of changes in interest
rates.

While we have not experienced customer concentration risk with
our revenue, we did have four customers who, in the aggregate,
accounted for 74% and 62% of the outstanding accounts receivable
balances at December 31, 2006 and 2005, respectively. These
balances were fully collected in the subsequent period.

Recent
Accounting Pronouncements

In July 2006, the FASB issued Financial Accounting Standards
Interpretation No., or FIN, 48, Accounting for
Uncertainty in Income Taxes. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with
SFAS No. 109 Accounting for Income Taxes.
FIN 48 prescribes a recognition and measurement method of a
tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosures and transactions. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We
adopted the provisions of FIN 48 on January 1, 2007.
We did not have any unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a
result of implementing FIN 48.

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which is applicable for
fiscal years beginning after November 15, 2007.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Although SFAS No. 157 does not require any
new fair value measurements, its application may, for some
entities, change current practices related to the definition of
fair value, the methods used to measure fair value and the
expanded disclosures about fair value measurements. We are
currently evaluating the impact of the adoption of
SFAS No. 157 on our financial statements.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. Under SFAS No. 159, we may
irrevocably elect to report marketable securities, hedges and
certain other items at fair value on a
contract-by-contract
basis with changes in value reported in earnings.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permissible,
provided that we have not yet issued interim financial
statements for 2007 and have adopted SFAS No. 157. We
are currently evaluating the impact of the adoption of
SFAS No. 159 on our financial statements.

Changes
in Accountants

Vitale,
Caturano & Company, Ltd.

Prior to engaging Carlin, Charron & Rosen, LLP, the
firm of Vitale, Caturano & Company, Ltd. served as our
independent registered public accounting firm. We had engaged
Vitale, Caturano & Company, Ltd. on August 17,
2006 to audit our financial statements as of and for the fiscal
year ended December 31, 2005 and to reaudit our financial
statements as of and for the fiscal year ended December 31,
2004, including audit procedures deemed necessary in their
professional judgment related to our January 1, 2004
opening balances. Vitale, Caturano & Company, Ltd.
informed us on March 5, 2007 that they would be resigning
as our independent registered public accounting firm following
completion of the audits, which were completed on May 3,
2007. On May 25, 2007, we engaged Carlin,
Charron & Rosen, LLP to audit our financial statements
as of and for the fiscal year ended December 31, 2006. We
also engaged Carlin, Charron & Rosen, LLP to reaudit
our financial statements for the fiscal year ended
December 31, 2005 so that all of the financial statements
contained elsewhere in this prospectus would be audited by the
same accounting firm. The decision to engage Carlin,
Charron & Rosen, LLP was discussed with and
recommended by our board of directors following acceptance of
Vitale, Caturano & Company, Ltd.s resignation.

Other than expressing substantial doubt about our ability to
continue as a going concern, the report of Vitale,
Caturano & Company, Ltd. regarding our financial
statements as of and for the fiscal year ended December 31,
2005, prior to being reaudited by Carlin, Charron &
Rosen, LLP, did not contain any adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.

There have been no disagreements with Vitale,
Caturano & Company, Ltd. on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, that, if not resolved to their
satisfaction, would have caused them to make reference thereto
in their reports regarding our financial statements as of and
for the fiscal years ended December 31, 2004 and 2005.

On May 31, 2007, Vitale, Caturano & Company, Ltd.
sent a letter to the audit committee of our board of directors
noting certain deficiencies in our internal controls, identified
in connection with their audit of our financial statements as of
and for the years ended December 31, 2004 and 2005, which
they considered to be material weaknesses. Vitale,
Caturano & Company, Ltd. indicated that we did not
maintain adequate accounting and finance personnel, that our
accounting system required significant manual effort, that we
were unable to identify, assess and resolve accounting issues,
and that we lacked formal, documented procedures and controls
over transaction processing and financial reporting. Vitale,
Caturano & Company, Ltd. considered these material
weaknesses in determining the nature, timing and extent of the
audit tests that were applied to their audits. In connection
with their reaudit of our financial statements as of and for the
fiscal year ended December 31, 2004, including audit
procedures deemed necessary in their professional judgment
related to our

The material weaknesses identified by Vitale,
Caturano & Company, Ltd. related primarily to the
inadequate personnel, processes and systems. Since June 2007, we
have begun to address these material weaknesses. We have hired a
new Chief Financial Officer and Controller, both of whom are
certified public accountants and have experience working with
both private and public companies. Although we have not yet
upgraded our accounting systems, including our general ledger
accounting software, the addition of a chief financial officer
and controller has enabled us to introduce compensating controls
and procedures. We have focused on improving the preparation of
fully adjusted, internally prepared, GAAP-compliant financial
statements, including footnote disclosures, the reconciliation
of key account balances on a timely basis, the identification
and resolution of accounting issues on a timely basis, the
implementation and monitoring of controls over cash flow,
expense review and budgeting and the implementation of control
over revenue recognition. We expect to continue to invest in our
business processes, systems and internal controls in
anticipation of being required to comply with Section 404
beginning with our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008.

During the two most recent fiscal years and any subsequent
interim period, we did not consult Carlin, Charron &
Rosen, LLP regarding the application of accounting principles to
a specified transaction or the type of audit opinion that might
be rendered on our financial statements or on any matter that
was the subject of a disagreement with Vitale,
Caturano & Company, Ltd. or a reportable event as
defined in applicable SEC rules.

We requested that Vitale, Caturano & Company, Ltd.
furnish us with a letter addressed to the SEC stating whether it
agrees with the above statements and, if it does not agree, the
respects in which it does not agree. A copy of such letter is
filed as an exhibit to the registration statement of which this
prospectus forms a part.

Cooper
Norman & Co.

Prior to engaging Vitale, Caturano & Company, Ltd.,
the firm of Cooper Norman & Co. served as our
independent accounting firm. Cooper Norman & Co. had
audited our financial statements as of and for the fiscal year
ended December 31, 2004. In connection with our engagement
of Vitale, Caturano & Company, Ltd. on August 17,
2006, we dismissed Cooper Norman & Co. as our
independent accounting firm. The decision to dismiss Cooper
Norman & Co. and to engage Vitale,
Caturano & Company, Ltd. was discussed with and
recommended by our board of directors.

The report of Cooper Norman & Co. regarding our
financial statements as of and for the fiscal year ended
December 31, 2004, prior to being restated and reaudited by
Vitale, Caturano & Company, Ltd., did not contain any
adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope or accounting
principles.

There have been no disagreements with Cooper Norman &
Co. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
that, if not resolved to their satisfaction, would have caused
them to make reference thereto in their report regarding our
financial statements as of and for the fiscal year ended
December 31, 2004.

During the two most recent fiscal years and any subsequent
interim period, we did not consult Vitale, Caturano &
Company, Ltd. regarding the application of accounting principles
to a specified transaction or the type of audit opinion that
might be rendered on our financial statements or on any matter
that was the subject of a disagreement with Cooper
Norman & Co. or a reportable event as defined in
applicable SEC rules.

We requested that Cooper Norman & Co. furnish us with
a letter addressed to the SEC stating whether it agrees with the
above statements and, if it does not agree, the respects in
which it does not agree. A copy of such letter is filed as an
exhibit to the registration statement of which this prospectus
forms a part.

NitroSecurity provides hardware and software products for
security monitoring, analysis and protection of computer
networks. Our products deliver comprehensive network intrusion
prevention, detailed security monitoring and regulatory
compliance reporting designed to improve network and operational
efficiencies. Our products also enable information technology
professionals to protect their networks by providing them with
the capability to view and analyze the real-time and historical
relationships between network traffic flow and security event
data with an interactive, graphical user interface and to
automatically block harmful or unwanted traffic that could
adversely affect their networks.

Organizations today increasingly focus on protecting their
networks from both internal and external threats. They require
solutions that monitor, analyze and protect their networks to
increase availability and avoid losing customer and corporate
data. Given the instances of customer and personnel data being
lost, stolen or compromised, companies of all sizes are
enhancing their capabilities to protect and store increased
amounts of network data to meet both their own internal
requirements and the increasing requirements of regulatory
compliance.

We design our products around our proprietary data management
technology, NitroEDB. We believe that our technology delivers
improved performance and scalability compared to existing data
management technologies, which gives us an advantage in the
intrusion prevention and network security management markets.
NitroEDB uses patented technology to deliver real-time query
results on extremely large databases, including those exceeding
billions of records. Our technology often enables our products
to deliver faster response times for applications that require
time sensitive processing of large volumes of data. We have
initially applied NitroEDB to address the increasing data
requirements of the intrusion prevention and network security
management markets and intend to apply the technology to
opportunities in other markets that need to analyze large
amounts of data in real-time.

We sell our products to medium and large-size companies,
academic institutions and government agencies through our direct
sales force and through partners. Since January 1, 2005, we
have sold our products, either directly or through our partners,
to approximately 130 end-user customers, including
organizations in the financial services, healthcare, retail and
hospitality industries, colleges and universities and federal,
state and local governments and agencies.

Industry
Background

According to the research firm Gartner, Inc., the intrusion
prevention market is projected to total $700 million in
revenue for 2006 and to grow to $1.58 billion in revenue
for 2010, representing a compound annual growth rate of
approximately 22%. In addition, according to Gartner, Inc., the
network security management market, which is also commonly
referred to as the security information and event management
market, is projected to total $356.8 million in revenue for
2006 and to grow to $781.5 million in revenue for 2010,
representing a compound annual growth rate of approximately 22%.

A major security problem facing companies today is how to
collect, store, process, analyze and report on the massive
amount of information generated by the numerous network and
security devices that have been installed on their networks.
Those devices include firewalls, servers, routers and intrusion
detection and prevention systems, many of which are intended to
counter threats and attacks (i.e., viruses, worms,
identity theft and fraud). Those threats and attacks have
resulted in significant network downtime, additional manpower
requirements, fines, customer settlements and reputational
damage.

There are a number of trends that are currently changing the
landscape in the intrusion prevention and network security
management markets. Those trends include:



Increased cost of a data breach. According to
the research firm Forrester Research, Inc., the cost of
replacing a stolen credit card is between $10 and $35 and the
cost of a data breach is between $90 and $305 per record
(e.g., per credit card or social security number), taking
into account such items as

notification expenses, fines, restitution, loss of customers and
loss of productivity. Each data breach event can involve
thousands or even millions of compromised or stolen data
records. As a result, the loss of sensitive data due to a
security breach can have a significant financial impact on
organizations.



Increased amount of data required to be analyzed and
stored. In the past, information technology
departments have primarily monitored only a small number of
locations within their networks. However, those departments are
increasingly being required to monitor and log data from almost
every location within their networks. As a result, the amount of
data being produced in a companys network has expanded
significantly, and companies need a more scalable and cost
effective system to manage and interpret this data.



Increased regulatory and statutory
requirements. With growing threats to industrial,
financial and personal information security, new industry
standards have been adopted, new regulations have been
promulgated and new legislation has been passed, designed to
improve the way that institutions protect sensitive data.
Information privacy and security is now governed by
industry-imposed standards such as the Payment Card Industry
Data Security Standard and statutes such as the Sarbanes-Oxley
Act of 2002, the Gramm-Leach-Bliley Act, the Federal Information
Security Management Act of 2002 and the Health Insurance
Portability and Accountability Act of 1996 and the regulations
promulgated under those laws. To satisfy these standards,
regulations and statutes, companies are required to deploy
systems, policies and programs that enforce information
security, control and monitoring, and reporting capabilities for
corporate assets. These standards, regulations and statutes are
often burdensome and expensive for many companies, as companies
are now forced to demonstrate compliance with security
requirements set by both industry and governmental bodies. For
many organizations, compliance has become a significant security
concern.



Increased interest in network flow data. New,
more elusive attacks and breaches have required companies to
examine network traffic more closely for anomalous behavior. All
data on a network is associated with a flow, meaning that every
piece of data has a source, destination and content. We believe
that tracking flows and correlating flows to network security
events will become a more critical requirement for network
security management solutions. Vendors have recently begun to
integrate traffic flow data reporting into their products,
making it possible to collect network-wide traffic data.
However, existing network security management products are
currently limited in scope or functionality due to the massive
amounts of information they must process.



Increased need for network security by organizations of all
sizes. Due to increased compliance requirements
and more frequent attacks, network monitoring, analysis and
protection has become a priority for organizations of all sizes.
Moreover, organizations with limited network security staffs or
system support capabilities place added value on solutions that
are easy to deploy and operate.



Increased demand for log management
functions. Regulatory requirements have made the
management of network activity and event records, which we refer
to as log management, one of the fastest growing areas of
network security. Most major regulations affecting network
security now require continuous logging of information and
effective log management. Network log management functions are
becoming more important due to the lack of guidance on what
needs to be captured for regulatory compliance (resulting in
more data being collected, stored and indexed in order to reduce
the risk of non-compliance), the need to store the data for a
longer period of time and the usefulness of detailed and
historical log data analysis for breach investigation and
general forensics.

Traditional firewall, anti-virus and other network security
solutions, while necessary to prevent the transfer of malicious
code, are not sufficient to address the new generation of
threats and targeted attacks. Many products have also been
developed in an attempt to collect and process the massive
amount of information generated by network and security
infrastructures. However, most of these products are limited in
their capability to process both real-time and forensic network
and security data in the volumes required by our customers.
Consequently, the intrusion prevention and network security
management markets have evolved to consist primarily of multiple
disparate and non-integrated solutions. More advanced network
security solutions that protect vital information assets in
real-time are needed.

We believe that our integrated solution consisting of intrusion
prevention, network behavior analysis, security event management
and log management will help companies increase the availability
of their computing systems and better maintain the integrity and
confidentiality of stored information. We accomplish these
objectives by embedding NitroEDB in all of our products to
enable the rapid collection and analysis of large amounts of
data, which results in a reduction of the amount of time,
equipment and personnel that a company must dedicate to its
overall network security. Our solutions offer the following
benefits to our customers:



High performance. Real-time analysis of both
live (streaming) and historical data reduces response time to
network threats and attacks.



Scalability and reduced total cost of
ownership. Our products are able to collect and
analyze large amounts of data. As a result, our customers do not
need to add additional network security solutions as frequently
to handle the growing amount of network data, thereby reducing
their overall investment in hardware and personnel.



Real-time historical log analysis. The
combination of NitroEDB and terabytes of local data storage
allows rapid analysis of historical data for auditing and
compliance reports.



Real-time baselines and trending. Real-time
statistical comparisons of current and historical data allow
anomalies to be rapidly detected and visualized using our
interactive graphical user interface.

NitroGuard IPS is a hardware device embedded with our
proprietary software that provides network intrusion detection
and prevention. NitroGuard IPS monitors network activity and
compares network traffic to signatures, or electronic profiles,
of known attacks and either allows or blocks the traffic while
alerting security administrators of suspicious activities.
Signatures are used to identify attacks such as
denial-of-service, worms, viruses and spyware. NitroGuard IPS
communicates with our NitroView products, creating an integrated
network security management solution.

NitroGuard IPS signatures are fully customizable by
administrators who are familiar with standard security syntax.
NitroGuard IPS currently supports over 4,000 unique
signatures, including all public-domain signatures and
additional attack and network anomaly signatures authored by our
Threat Analysis Center, located at our research and development
facility in Idaho Falls, Idaho. These signatures are updated
regularly and made available to our customers who purchase our
maintenance and support services.

NitroView ESM is our lead product because it contains our most
advanced functionality. NitroView ESM collects network and
security data from our NitroGuard IPS and many third-party
network, security and host devices and provides real-time
analysis of both current data and large stores of historical
data. The data is managed using an interactive graphical user
interface that adjusts in real-time, providing correlated
results, event notifications, data export to other information
tools and printed reports. NitroView ESM version 7.2, which
was released in June 2007, offers improved performance,
additional functionality and an improved graphical interface.

NitroView Receiver is our data collector that provides NitroView
ESM with network flow and log information from firewalls,
switches, routers and network devices manufactured by other
companies. NitroView Receiver also improves the performance of
switches and routers by allowing flow management to be
transferred from the switches and routers to NitroView Receiver.

NitroView ESS is a scaled down version of NitroView ESM that is
designed to provide a management interface to just NitroGuard
IPS. NitroView ESS performs the same functionality as NitroView
ESM, except that it does not accept third-party data from
NitroView Receiver.

Maintenance,
Support Services and Warranty

We offer ongoing maintenance and support services to our
customers. These maintenance and support programs are typically
sold to customers for an initial one-year term at the time they
purchase our products and typically renew for successive
one-year periods. We provide telephone and web-based support,
software updates and bug fixes, documentation updates, and rule
and vulnerability signature updates as part of our maintenance
and support programs. We make available all upgrades, releases,
patches and new rules to our customers through our website. We
also offer our customers a choice of receiving updates
automatically or manually. Our maintenance and support team is
located at our research and development facility in Idaho Falls,
Idaho.

We provide a
90-day
warranty for our software that covers both the ability of the
software to conform to its documented specifications and the
usability of the media on which the software ships. We also
provide a standard hardware warranty of one year for all of our
products that ship as a software and hardware bundle.

Professional
Services and Training

Our sales engineers assist our customers and partners in the
configuration, installation and proper usage of our products.
These fee-based services include security solution architecture
design and customization and configuration of our products for
the customers particular network characteristics. Our
professional services and training are sold and delivered either
directly through our personnel or indirectly through our
authorized resellers and training and service partners.

N-Tree
Indexing. N-Tree
indexing is our primary intellectual property that enables the
high performance characteristics of our products.
N-Tree
indexing is a different way of storing and retrieving data from
a database. NitroEDBs patented
N-Tree
indexing provides index-accessible data, allowing data lookups
and counts without requiring full database table scans. Table
scans can often require minutes or even hours to complete due to
the billions of database records that network security
management systems often contain. NitroEDBs indexing
capabilities allow event, log, packet and flow counts, filtered
data queries for event, flow and log isolation, and correlation
and other common security management tasks to be performed
without fully scanning database tables.
N-Tree
indexing also provides a mechanism for simultaneous database
queries and database insertions. In most database systems, the
database is required to lock itself while either database
queries or database insertions are being performed in order to
preserve the integrity of the data. NitroEDB overcomes this
limitation and allows both tasks to occur simultaneously with
little performance impact. The

elimination of database table scans and the ability to
simultaneously perform database queries and insertions provides
what we believe is a significant performance advantage over
competitive data management solutions.

Index Accumulation. Index accumulation allows
NitroEDB to perform mathematical and statistical operations on
the N-Tree
indexed data. Calculations, such as averages, sums, standard
deviations and other mathematical functions, can be performed in
real-time without multiple full database table scans or process
intensive calculations. Index accumulation allows us to combine
the functionality of multiple products into a single product.

Any-Memory Architecture. NitroEDB uses
Any-Memory architecture to run as either a data management
system using the computers random access memory or a data
storage system using the computers hard drive, or a
combination of both. As a result, NitroEDB is able to run on a
variety hardware that might not otherwise be able to handle the
requirements of a data management system, including many less
expensive, off-the-shelf options.

Context Sensitive Analytics. Context sensitive
analytics refers to the use of the index accumulation technology
in NitroEDB to provide real-time, context-driven overlay of
trend information. We believe that the use of context sensitive
analytics will streamline the workflow of network security
administrators by removing the extra step of performing explicit
trend analysis in their data reports. For example, NitroView ESM
calculates time-correlated baselines in real-time, providing a
historical context for data, and overlays this information on
top of bar charts and distribution graphs that are already being
used for typical network security administration purposes.

Real-Time Information Correlation. Real-time
information correlation refers to the use of
N-Tree
indexing and the general performance advantages of NitroEDB to
provide real-time correlation of multiple retrieved data sets.
In this way, dynamically linked reports may be generated such
that one report will update automatically to reflect the new
situational context of another report. Reports, using lists,
counts, pie charts, bar charts, line
and/or area
charts, and distribution graphs may be linked together to create
cascading contextual updates. We believe that this mechanism of
rapidly updating data query results to reflect new contexts
provides an efficient and unique way to facilitate the
identification of network security threats, identify audit
trails for regulatory compliance efforts and perform any other
task requiring the multi-dimensional analysis of large amounts
of disparate data.

Maintaining our technological leadership. We
intend to add additional features and build upon the
technological advantage of our existing products. We plan to
leverage our core asset, NitroEDB, by adding additional features
and functionality, which will broaden the market acceptance of
our products.



Increasing our original equipment manufacturer, strategic
partner and distribution channels. We believe that we have
an opportunity to achieve significant revenue growth through
original equipment manufacturer, partner and distribution
relationships. Such relationships might include traditional
network infrastructure companies that do not currently offer
network security management products and companies that are
already strong in the network security management market.



Expanding our customer base. We believe that
we have an opportunity to expand our customer base in the
intrusion prevention and network security management markets as
our technology and products

become more widely adopted. We believe that the need to manage
increasing network data volumes will present us with an
opportunity to target medium and large-size companies, academic
institutions and government agencies that require high
performance data management capabilities.



Expanding our relationships with our
customers. As our customer base and product sets
grow, we intend to leverage our customer relationships to sell
new products and expand our revenue potential within our
existing customer base. We will educate our customers who have
purchased our intrusion detection and prevention products about
our network security management products and the additional
benefits that an integrated network security management solution
can bring to their overall security posture.



Strengthening our presence outside of the United
States. We believe that there is significant
market opportunity outside of North America that we can target
with our network security products. We have recently entered
into an agreement with a reseller in the United Kingdom to
represent us throughout Europe, which we expect will provide us
with a presence in that marketplace without the need to build
significant infrastructure. We have also entered into an
agreement with an affiliate of one of our
U.S.-based
partners to represent us in Mexico.



Expanding into other network security
markets. We believe that our products are capable
of expanding into other network security markets, including
security information management, network behavior, anomaly
detection, vulnerability management and unified threat
management. We intend to evaluate the acquisition of, or
investment in, companies, technologies, products or assets that
complement our current products. Although we currently have no
present understandings, commitments or agreements to enter into
any acquisitions or make any investments, we believe that we
could enhance our own product and technology offerings by
integrating them with various third-party technologies.

NitroEDB

We believe that the performance and scalability characteristics
of NitroEDB are well suited for solving complex problems in many
markets outside of intrusion prevention and network security
management. As a result, we are exploring opportunities to apply
NitroEDB to the broader data management market and the complex
event processing market.

Data Management. We are currently pursuing
original equipment manufacturer, integration and strategic
partner relationships for NitroEDB in the broader data
management market. In September 2006, we entered into a joint
marketing and development agreement with MySQL AB, a
leading database provider, to integrate NitroEDB into
MySQLs database server. We are developing a product, which
we call NitroEDB for MySQL, which is intended to be
a high data volume, high performance database management system
to be compatible with applications utilizing MySQLs
current release of its database server. We expect that NitroEDB
for MySQL will be marketed by both companies. We believe that by
integrating NitroEDB into MySQLs database server, MySQL
users would be able to gain the performance enhancements of
NitroEDB, while still being able to use MySQLs database
server, for which thousands of business applications have
already been written.

Complex Event Processing. Complex event
processing is the ability to process and analyze multiple
streams of high volume, high speed events for purposes of
identifying opportunities and related events in real-time. We
believe that complex event processing products built around
NitroEDB would be faster and less costly than currently
available applications and would provide a better solution for
the real-time issues that organizations are increasingly facing.
We believe that the complex event processing markets that we
might be able to compete in include:



Supply chain management. Increased use of
radio frequency identification and other tagging technologies to
track inventory and shipments and to identify supply chains
bottlenecks, points of loss and distribution inefficiencies is
expected to create a demand for faster systems to analyze data.

Telematics. Telematics is the use of
telecommunications devices, like global positioning systems, to
convey information. Telematics is used by such industries as the
transportation industry for vehicle tracking and transportation
system management and control and the healthcare industry for
patient flow management and monitoring.



Demand response. Demand response refers to
managing the energy demands of customers in response to supply
conditions. We expect that the need for demand response
technologies will increase as the demand for, and competition
in, alternative energy sources increases.



Securities and commodities trading. The
integration of technology into securities and commodities
trading has enabled trades to be made quicker and more
efficiently. We expect that technology will play an even larger
role in the future, including the implementation and monitoring
of complex artificial intelligence-based trading strategies.



Security and surveillance. Both the military
and public sectors have begun to use artificial
intelligence-based applications for real-time detection,
analysis and threat response in such areas as battlefield
tactics, immigration and port-of-entry management. We expect
that the security and surveillance market will continue to grow
as faster processing technology becomes available.

Competition

The intrusion prevention and network security management markets
are highly competitive and we expect the competition to
intensify. Our main competitors fall into the following
categories:

Network infrastructure companies (hardware and software) that
could integrate functions or features similar to our products
into their own products, including 3Com, Cisco, EMC, IBM and
Juniper; and



Other companies that offer products that compete with components
or individual functions of our products.

We believe that there are a number of important factors to
compete effectively in the intrusion prevention and network
security management markets, including performance, price,
product functionality, technical features, ease of use, customer
service and support and sales and marketing.

Our current and potential competitors may have significantly
greater financial, technical, marketing and other resources than
we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. Our
competitors may have more extensive customer bases and broader
customer relationships than we do, including relationships with
our potential customers. In addition, these competitors may have
longer operating histories and greater name recognition than we
do. Our competitors may be in a stronger position to respond
quickly to new technologies and may be able to market and sell
their products more effectively. Moreover, if one or more of our
competitors were to merge or partner with another of our
competitors, the change in the competitive landscape could
adversely affect our customer relationships and competitive
position or otherwise affect our ability to compete effectively.

Customers

Our customers are primarily medium and large-size companies who
have deployed network security products to protect their network
infrastructure. Our products have been purchased by
organizations in the financial services, healthcare, retail and
hospitality industries, by academic institutions and by federal,
state and local governments and agencies. Our products are also
purchased by managed service providers, who in turn provide
network security services to a similarly broad range of
customers and industries.

A typical customer would deploy a number of NitroGuard IPS
products throughout its network, with the quantity being larger
for more distributed and redundant networks. The customer would
also usually purchase either a NitroView ESM or NitroView ESS
product, with NitroView ESM being the most common due to the
need to manage data from third-party network devices.
Implementation of a NitroView ESM would also typically consist
of one or more NitroView Receivers. Our NitroGuard IPS and
NitroView products also have an annual maintenance component.
Generally, all of our customers participate in our maintenance
program.

Since January 1, 2005, we have sold our products, either
directly or through our partners, to approximately
130 end-user customers, including Online Resources
Corporation, St. Joseph Hospital (Nashua, NH), Greenville
Utilities Commission, New York State Emergency Management
Office, City of Kirkwood, Missouri, Texas Workforce Commission
and Colby-Sawyer College.

Sales and
Marketing

We market and sell our products and services using a combination
of direct sales and partners. We employ direct sales teams in
strategic locations throughout the United States. Each sales
team consists of a regional sales director, a senior security
engineer and an inside sales representative. These teams are
supported by both internal and outsourced lead
generation/telemarketing personnel. We also have managed
security service and channel partners in the United States, a
partner in the United Kingdom that sells and supports our
products in Europe and an affiliate of one of our
U.S.-based
partners that sells and supports our products in Mexico.

Sales

As of June 30, 2007, our sales organization was comprised
of approximately 19 full-time individuals located across
the United States. Our sales personnel are responsible for all
aspects of the sale to our customers, from initial meeting
through implementation, and act as liaisons between our
customers and our marketing and product development departments.
Our sales personnel are also responsible for reseller market
development within their respective regions, including managing
reseller relationships and assisting resellers in obtaining and
supporting customer accounts. Our sales organization is
supported by a team of experienced sales engineers who are
responsible for providing pre-and post-sales support and
training for customers and partners.

Although we primarily sell our products on a direct basis, we
are working to expand our relationships with strategic partners.
We believe that strategic partnerships will provide us with an
opportunity to expand both our domestic and international
business. We train and assist these partners in promoting,
selling and deploying our products.

Marketing

Our marketing function consists primarily of sales support
programs, product management and product marketing. Marketing
also includes public relations, direct marketing, advertising,
website development and trade shows and is designed to build our
brand awareness and generate sales leads. We have two full-time
employees in our marketing department.

Intellectual
Property

Our success depends in part upon our ability to obtain and
maintain protection for our proprietary products, technology and
know-how, to operate without infringing the proprietary rights
of others and to prevent others from infringing our proprietary
rights. Our policy is to seek to protect our proprietary
position by, among other methods, filing patent applications
related to our proprietary technology, inventions and
improvements that are important to the development of our
business. We also rely on trademarks, copyrights, trade secrets,
know-how and continuing technological innovation to develop and
maintain our proprietary position.

As of June 30, 2007, we had one issued patent and three
pending patent applications in the United States, all of which
relate to the methodology and functionality of NitroEDB. Our one
issued patent covers
N-Tree
indexing, which is a method of storing and retrieving data from
a database. The expiration date for our issued patent is
July 18, 2020.

The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success in obtaining effective
patent claims and enforcing those claims once granted. We do not
know whether any of our patent applications will result in the
issuance of any patents. Our issued patent and those that may
issue in the future may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors
from marketing related products or shorten the term of patent
protection that we may have for our products. In addition, the
rights granted under any issued patents may not provide us with
competitive advantages against competitors with similar
technology. Furthermore, our competitors may independently
develop similar technologies or duplicate any technology
developed by us.

We rely, in some circumstances, on trade secrets to protect our
technology. Trade secrets, however, are difficult to protect. We
seek to protect our proprietary technology and processes, in
part, by confidentiality agreements with our employees and
consultants. These agreements may be breached, and we may not
have adequate remedies for any breach. In addition, our trade
secrets may otherwise become known or be independently
discovered by competitors. To the extent that our employees or
consultants use intellectual property owned by others in their
work for us, disputes may arise as to the rights in related or
resulting know-how and inventions.

We use trademarks on our products and believe that having
distinctive marks may be an important factor in marketing our
products. Our trademarks include NitroSecurity,
NitroEDB, NitroView,
NitroGuard,
N-Tree,
Any-Memory and the NitroSecurity logo. None of these
trademarks have been registered, although three applications are
pending.

Research
and Development

As of June 30, 2007, we had approximately 25 employees
in research and development. Our research and development team
includes personnel with core expertise in database development,
computer networking, information security, software and hardware
development, human user interface design, quality assurance and
technical support. Our research and development efforts are
focused on enhancing NitroEDB, enhancing our existing products
and developing new products.

For the fiscal years ended December 31, 2006 and 2005, we
spent approximately $3.4 million and $2.7 million,
respectively, on research and development activities.

Manufacturing

We rely on two contract manufacturers to assemble, integrate,
test and ship our products, which consist of hardware embedded
with our proprietary software. We maintain sufficient inventory
to meet obligations to our customers for demonstration and
replacement equipment. We believe that outsourcing our
manufacturing enables us to conserve working capital, better
adjust to fluctuations in demand and provide for timely delivery
to our customers.

Although there are multiple sources for most of the component
parts of our products, some components are sourced from limited
sources. For example, the network interface cards used in our
products are currently only available from limited sources. We
typically do not have a written agreement with any of these
component manufacturers to guarantee the supply of the key
components used in our products, and we do not require our
manufacturers to have a written agreement with these component
manufacturers. We regularly monitor the supply of the component
parts and the availability of alternative sources. We provide
forecasts to our manufacturers so that they can source the key
components in advance of their anticipated use, with the
objective of maintaining an adequate supply of these key
components for use in the manufacture of our

products. In addition, we maintain a small inventory of key
components that we believe are most critical to the
manufacturing process.

Employees

As of June 30, 2007, we had 51 full-time employees,
with 21 in sales and marketing, 25 in research and development
and five in finance and administration. We supplement this
full-time workforce by outsourcing activities in each functional
area to multiple third parties with relevant expertise. We
consider our relationships with our employees to be good.

We are not a party to any collective bargaining agreements
covering any of our employees, have never experienced any
material labor disruption and are unaware of any current efforts
or plans to unionize our employees.

Properties

Our principal executive offices are located in Portsmouth, New
Hampshire, where we occupy an aggregate of approximately
11,200 square feet under leases that are month-to-month
with respect to approximately 3,000 square feet, expire in
October 2010 with respect to approximately 3,900 square
feet and expire in March 2008 with respect to approximately
4,300 square feet. Our research and development facility is
located in Idaho Falls, Idaho, where we occupy an aggregate of
approximately 4,700 square feet under leases that expire in
September 2007. We also maintain a sales office in Reston,
Virginia pursuant to a lease for approximately 2,400 square
feet that expires in February 2008. We believe that our
facilities are in good condition and are generally suitable to
meet our needs for the foreseeable future.

Legal
Proceedings

We are, from time to time, a party to legal proceedings that
arise in the normal course of business. We are not currently
involved in any material litigation, the outcome of which would,
in managements judgment, have a material adverse effect on
our results of operations or financial condition.

The names, ages and titles of our executive officers and
directors as of August 9, 2007 are as follows:

Name

Age

Position

Kenneth R. Levine

43

President, Chief Executive Officer
and
Chairman of the Board

John M. Parsons

48

Chief Financial Officer and
Treasurer

Howard D. Stewart

56

Executive Vice President of
Engineering and Director

Seth A. McClead

30

Executive Vice President of
Operations and Secretary

Martin F. (Frank) Hayes

49

Senior Vice President of Marketing

Norman J. Rice, III

33

Director

Howard S. Smith

37

Director

Kenneth R. Levine has been a member of our board
of directors and has served as Chairman of the Board since
February 2005, our Chief Executive Officer since April 2006 and
our President since August 2007. Since June 2004,
Mr. Levine has served as a partner of Brookline Venture
Partners, a venture capital firm that he founded, and which is
our largest stockholder. From 1998 to June 2004, Mr. Levine
was a private investor in various companies. From 1985 to 1998,
Mr. Levine served as Executive Vice President of Sales of
Cabletron Systems, Inc., a provider of networking solutions.
Mr. Levine holds a B.S. degree from the Wharton School of
Business at the University of Pennsylvania.

John M. Parsons has served as our Chief Financial
Officer since July 2007 and our Treasurer since August 2007.
Mr. Parsons has also served as a partner in Tatum, LLC, an
executive services firm, since April 2007, and as President of
John Parsons Associates LLC, a financial advisory firm, since
February 2004. From April 2004 to May 2006, Mr. Parsons
served as Chief Accounting Officer of RSA Security Inc., a
provider of online identity and digital asset protection
solutions. From July 1986 to April 2003, Mr. Parsons served
in various financial and operational leadership roles, including
Vice President, with Hewlett-Packard/Agilent Technologies across
their computer, measurement and telecom businesses.
Mr. Parsons holds a B.S. degree from California State
University Northridge and an M.B.A. degree from the Stanford
Graduate School of Business. Mr. Parsons is also a
certified public accountant.

Howard D. Stewart has served as our Executive Vice
President of Engineering since October 2004 and has been a
member of our board of directors since October 2001.
Mr. Stewart also served as our President from November 2001
to October 2004 and as our Director of Software Development from
May 1999 to November 2001. Prior to joining us in May 1999,
Mr. Stewart served as an Advisory Engineer with
Lockheed-Martin Idaho Technologies Company and as a Senior
Engineering Specialist with EG&G Idaho, Inc., both of which
work in conjunction with the Idaho National Engineering
Laboratory to develop solutions to engineering and environmental
problems for the Department of Energy, other federal agencies
and private industry. Mr. Stewart holds a B.S. degree from
Brigham Young University and an M.S.B.A. degree from the
University of Northern Colorado.

Seth A. McClead has served as our Executive Vice
President of Operations since June 2005 and our Secretary since
January 2006. Mr. McClead also served as our Managing
Director of Engineering Services from January 2005 to May 2005.
From June 1998 to November 2004, Mr. McClead held various
positions at NMI InfoSecurity Solutions, Inc., an information
security consultancy, including as Network Analyst, Senior
Engineer and, most recently, Chief Operating Officer.
Mr. McClead holds a B.A. degree from Bowdoin College.

Martin F. (Frank) Hayes has served as our Senior
Vice President of Marketing since April 2006. Prior to joining
us, Mr. Hayes served as Chief Executive Officer of Single
Digits, Inc., a provider of managed wireless internet services,
from March 2004 to December 2005. From July 2002 to December
2003, Mr. Hayes served

as Vice President of Marketing and Business Development of Ipsum
Networks, Inc., a network management software company. From 1999
to July 2002, Mr. Hayes served as Senior Director of
Product Marketing for Aprisma Management Technologies, Inc., a
provider of network management solutions. Mr. Hayes holds a
B.S. degree from Texas A&M University and an M.B.A. degree
from New Hampshire College.

Norman J. Rice, III has served as a member of
our board of directors since July 2007. Mr. Rice has been
Vice President and General Manager of the Telecommunications
Software business unit of CA, Inc., a provider of information
technology management software, since June 2005. He has also
been Managing Partner of Dawn Patrol, LLC, a management
consulting firm, since September 2006. From March 2005 to June
2005, Mr. Rice served as Vice President of Business
Development of the Aprisma Management Technologies business unit
of Concord Communications, Inc., a provider of network service
management software solutions, until its acquisition by CA, Inc.
in June 2005. From January 2002 to March 2005, Mr. Rice
served as Vice President of Business Development of Aprisma
Management Technologies, Inc., a provider of information
technology software solutions, until its acquisition by Concord
Communications, Inc. in March 2005. Mr. Rice holds a B.S.
degree from the University of Michigan and Master of Engineering
Management and M.S. degrees from Dartmouth College.

Howard S. Smith has served as a member of our
board of directors since February 2005. Mr. Smith has been
a managing director of First Analysis Corporation, a
research-based investment firm that manages a group of funds
that together constitute our second largest stockholder, since
September 2001. Mr. Smith first joined First Analysis
Corporation in January 1994. Mr. Smith holds a B.S. degree
from the University of Illinois at Urbana-Champaign and an
M.B.A. degree from the University of Chicago. Mr. Smith is
also a certified public accountant.

Board
Composition

Our board of directors currently consists of four members, all
of whom were elected as directors pursuant to the board
composition provisions of an amended and restated stockholders
agreement that we have entered into with all of the holders of
our preferred stock and some of the holders of our common stock.
The board composition provisions of the amended and restated
stockholders agreement will terminate upon the effectiveness of
the registration statement of which this prospectus is a part
and there will be no further contractual obligations regarding
the election of our directors. Our directors hold office until
their successors have been elected and qualified or until the
earlier of their resignation or removal. There are no family
relationships among any of our directors or executive officers.

In accordance with the terms of our restated certificate of
incorporation and amended and restated by-laws that will become
effective following the effectiveness of the registration
statement of which this prospectus is a part, our board of
directors will be divided into three classes, each of which
shall consist, as nearly as possible, of one-third of the total
number of directors constituting our entire board of directors
and each of whose members will serve for staggered three-year
terms. As a result, only one class of our board of directors
will be elected each year from and after the closing of this
offering. Upon the closing of this offering, the members of the
classes will be divided as follows:



the class I directors will be
Messrs. ,
and their term will expire at the annual meeting of stockholders
to be held in 2008;



the class II directors will be
Messrs. ,
and their term will expire at the annual meeting of stockholders
to be held in 2009; and



the class III directors will be
Messrs. ,
and their term will expire at the annual meeting of stockholders
to be held in 2010.

Our restated certificate of incorporation and amended and
restated by-laws that will become effective following the
effectiveness of the registration statement of which this
prospectus is a part provide that our directors may be removed
only for cause by the affirmative vote of the holders of at
least
662/3%
of the votes that all our stockholders would be entitled to cast
in an annual election of directors. Upon the expiration of the

term of a class of directors, directors in that class will be
eligible to be elected for a new three-year term at the annual
meeting of stockholders in the year in which their term expires.

Director
Independence

Under Rule 4350 of the NASDAQ Marketplace Rules, a majority
of a listed companys board of directors must be comprised
of independent directors within one year of listing. In
addition, NASDAQ Marketplace Rules require that, subject to
specified exceptions, each member of a listed companys
audit, compensation and nominating and governance committees be
independent and that audit committee members also satisfy
independence criteria set forth in
Rule 10A-3
under the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act. Under Rule 4200(a)(15) of the
NASDAQ Marketplace Rules, a director will only qualify as an
independent director if, in the opinion of that
companys board of directors, that person does not have a
relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director. In order to be considered to be independent for
purposes of
Rule 10A-3,
a member of an audit committee of a listed company may not,
other than in his or her capacity as a member of the audit
committee, the board of directors or any other board committee
(1) accept, directly or indirectly, any consulting,
advisory or other compensatory fee from the listed company or
any of its subsidiaries or (2) be an affiliated person of
the listed company or any of its subsidiaries.

In
2007, our board of directors undertook a review of the
composition of our board of directors and its committees and the
independence of each director. Based upon information requested
from and provided by each director concerning their background,
employment and affiliations, including family relationships, our
board of directors has determined that none of
Messrs. ,
representing
of
our
directors, has a relationship that would interfere with the
exercise of independent judgment in carrying out the
responsibilities of a director and that each of these directors
is independent as that term is defined under
Rule 4200(a)(15) of the NASDAQ Marketplace Rules. Our board
of directors also determined that
Messrs. ,
who comprise our audit committee,
Messrs. ,
who comprise our compensation committee, and
Messrs. ,
who comprise our nominating and governance committee, satisfy
the independence standards for those committees established by
applicable SEC rules and the NASDAQ Marketplace Rules. In making
this determination, the board of directors considered the
relationships that each non-employee director has with our
company and all other facts and circumstances the board of
directors deemed relevant in determining their independence,
including the beneficial ownership of our capital stock by each
non-employee director.

Board
Committees

Our board of directors has established an audit committee, a
compensation committee and a nominating and corporate governance
committee. Each committee operates under a charter that has been
approved by our board of directors.

Audit
Committee

The members of our audit committee are
Messrs. .
Our board of directors has determined that each of the members
of our audit committee satisfies the requirements for financial
literacy under the current requirements of the NASDAQ Capital
Market rules and regulations.
Mr.
is the chairman of the audit committee and is also an
audit committee financial expert, as defined by SEC
rules, and satisfies the financial sophistication requirements
of the NASDAQ Marketplace Rules. Our audit committee assists our
board of directors in its oversight of our accounting and
financial reporting process and the audits of our financial
statements.

The audit committees responsibilities include:



appointing, retaining, approving the compensation of and
assessing the independence of our independent registered public
accounting firm;

meeting independently with our independent registered public
accounting firm and management; and



preparing the audit committee report required by SEC rules.

All audit services to be provided to us and all non-audit
services, other than de minimis non-audit services, to be
provided to us by our independent registered public accounting
firm must be approved in advance by our audit committee.

Compensation
Committee

The members of our compensation committee are
Messrs. .
Mr.
is the chairman of the compensation committee. Our compensation
committee assists our board of directors in the discharge of its
responsibilities relating to the compensation of our executive
officers. The compensation committees responsibilities
include:



evaluating the performance of our chief executive officer and
our other executive officers;



reviewing and approving, or making recommendations to the board
of directors with respect to, the compensation of our chief
executive officer and our other executive officers;



overseeing and administering, and making recommendations to the
board of directors with respect to, our cash bonuses and equity
incentive plans;



reviewing and making recommendations to the board of directors
with respect to director compensation; and



preparing the compensation committee reports required by SEC
rules.

Nominating
and Corporate Governance Committee

The members of our nominating and corporate governance committee
are
Messrs. .
Mr.
is the chairman of the nominating and corporate governance
committee. The nominating and corporate governance
committees responsibilities include:



recommending to the board of directors the persons to be
nominated for election as directors or to fill vacancies on the
board of directors, and to be appointed to each of the
boards committees;



overseeing an annual review by the board of directors with
respect to management succession planning;



developing and recommending to the board of directors corporate
governance principles and guidelines; and



overseeing periodic evaluations of the board of directors.

Compensation
Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board
of directors or compensation committee, or other committee
serving an equivalent function, of any entity that has one or
more executive officers who

serve as members of our board of directors or our compensation
committee. None of the members of our compensation committee is
an officer or employee of our company, nor have they ever been
an officer or employee of our company.

Code of
Business Conduct and Ethics

We have adopted a code of business conduct and ethics that
applies to all of our employees, officers and directors,
including those officers responsible for financial reporting.
The code of business conduct and ethics will be available on our
website at www.nitrosecurity.com. We expect that any
amendments to the code, or any waivers of its requirements, will
be disclosed on our website.

Director
Compensation

The following table sets forth information with respect to the
compensation, exclusive of reimbursed out-of-pocket expenses,
received by our non-employee directors for their service during
the fiscal year ended December 31, 2006:

Option

Awards

Total

Name

($)

($)

William C. Jackson, Jr.(1)





Craig Nankervis(1)





Gregg J. Ormond(1)

7,302

(2)

7,302

Howard S. Smith





(1)

Messrs. Jackson, Nankervis and Ormond resigned from the
board of directors on January 12, 2006 in connection with
the initial closing of our Series C preferred stock
financing.

(2)

The value of an option to purchase 20,363 shares of our
common stock at $0.40 per share granted on January 12,
2006, determined in accordance with the SFAS No. 123R. See
Note 2 to our financial statements for the year ended
December 31, 2006 regarding assumptions underlying the
valuation of our equity awards. None of these options were
exercised as of December 31, 2006.

Other than the stock option that was granted to Mr. Ormond,
our non-employee directors did not receive during 2006, and do
not currently receive, any compensation from us for their
service as directors, although we do reimburse our non-employee
directors for reasonable travel and other expenses incurred in
connection with attending board and committee meetings. In
addition, during 2006, none of our directors who were also
employees received, or is currently receiving, any compensation
in connection with his service as a director.

In
2007, our board of directors approved a compensation program,
which will become effective upon the closing of this offering,
pursuant to which we will pay each non-employee director an
annual retainer of $ for service
as a director. Each non-employee director will also receive an
annual fee of $ for each committee
of the board of directors on which such director serves. The
chair of our audit committee will receive an additional annual
retainer of $ and our other
committee chairs will receive an additional annual retainer of
$ . We will reimburse each
non-employee member of our board of directors for out-of-pocket
expenses incurred in connection with attending our board and
committee meetings.

In addition, each non-employee director will receive an option
to
purchase shares
of our common stock upon his or her initial appointment to our
board of directors. These options will vest over a four-year
period, with 25% of the shares underlying the option vesting on
the first anniversary of the date of grant and an additional
6.25% of the shares underlying the option vesting each three
months thereafter, subject to the non-employee directors
continued service as a director. The exercise price of these
options will equal the fair market value of our common stock on
the date of grant.

Each non-employee director will also receive an annual option
grant to
purchase shares
of our common stock at each annual meeting after which he or she
continues to serve as a director, provided each such
non-employee director has served on our board of directors for
at least six months. These options will

vest over a four-year period, with 25% of the shares underlying
the option vesting on the first anniversary of the date of grant
and an additional 6.25% of the shares underlying the option
vesting each three months thereafter, subject to the
non-employee directors continued service as a director.
The exercise price of these options will equal the fair market
value of our common stock on the date of grant.

Executive
Compensation

Summary
Compensation Table

The following table sets forth information regarding
compensation earned by our President and Chief Executive
Officer, our Executive Vice President of Business Development,
our former Chief Financial Officer and each of our two other
most highly compensated executive officers during our fiscal
year ended December 31, 2006. We refer to these executive
officers as our named executive officers elsewhere
in this prospectus.

Option

All Other

Name and Principal

Awards

Compensation

Position

Salary ($)

Bonus ($)

($)(1)(2)

($)

Total ($)

Kenneth R. Levine



(3)



3,124



3,124

President, Chief Executive
Officer and
Chairman of the Board

Terry B. Christensen

173,673

17,500

35,922

(5)

213,716

(6)

440,811

Executive Vice President of
Business Development, Former President, Chief Executive Officer
and Treasurer(4)

Brian E. Doherty

108,648



4,948

(8)

90

(9)

113,686

Former Chief Financial
Officer(7)

Howard D. Stewart

130,923



17,423

(10)

11,875

(11)

160,221

Executive Vice President of
Engineering and Director

Seth A. McClead

109,415

15,000

3,065

(12)

3,463

(13)

130,943

Executive Vice President of
Operations and
Secretary

(1)

Amounts calculated in accordance with the provisions of
SFAS No. 123R. See Note 2 to our financial
statements for the year ended December 31, 2006 regarding
assumptions underlying the valuation of our equity awards.

(2)

On November 7, 2006, all of the stock options held by our
named executive officers were amended to have an exercise price
of $0.60 per share. The amendments were made in connection with
an offer to reprice that we made to all of our option holders as
of October 6, 2006 who held stock options with exercise
prices higher than $0.60 per share. Amounts represented in this
column reflect the net change in value resulting from the
amendments.

(3)

Mr. Levine declined to receive a salary for his service as
Chief Executive Officer during the fiscal year ended
December 31, 2006.

(4)

Mr. Christensen resigned as Chief Executive Officer on
April 24, 2006. As of August 8, 2007,
Mr. Christensen was no longer our President or
Treasurer.

(5)

Includes three stock options that we granted to
Mr. Christensen during the fiscal year ended
December 31, 2006. On October 5, 2006, we granted
Mr. Christensen a stock option to purchase
45,000 shares of our common stock with an exercise price of
$0.60 per share, all of which were vested as of the date of
grant. Also on October 5, 2006, we granted
Mr. Christensen a stock option to purchase
55,000 shares of our common stock with an exercise price of
$0.60 per share, one-third of which vested on March 1, 2007
and the remainder of which vest in 24 equal monthly installments
beginning on April 1, 2007. On November 7, 2006, we
granted Mr. Christensen a stock option to purchase
200,000 shares of our common stock with an exercise price
of $0.60 per share, which vest based on the satisfaction of
various

performance criteria. 50,000 shares underlying this option
were cancelled on February 1, 2007 because one of the
performance criteria was not met. The vesting of the remaining
shares is based on performance criteria that must be satisfied
by December 31, 2007.

(6)

Consists of $6,544 that we contributed to
Mr. Christensens 401(k) plan, $108 that we paid for
the premiums on a $50,000 term life insurance policy, of which
Mr. Christensen has selected the beneficiaries, and
$210,000 in severance payments that we paid Mr. Christensen
pursuant to the transition agreement that we entered into with
him on February 15, 2006, of which $2,936 was retained by
us for reimbursement of certain expenses under
Mr. Christensens expense account.

(7)

Mr. Doherty resigned as our Chief Financial Officer on
April 6, 2007.

(8)

Consists of one stock option that we granted to Mr. Doherty
during the fiscal year ended December 31, 2006. On
November 7, 2006, we granted Mr. Doherty a stock
option to purchase 190,000 shares of our common stock with
an exercise price of $0.60 per share, one-third of which vested
on February 17, 2007 and the remainder of which were to
vest in 24 equal monthly installments beginning on
March 17, 2007. Following his resignation, Mr. Doherty
exercised 60,000 shares underlying this option on
July 6, 2007. The remaining shares were either canceled
upon his resignation because they were unvested or expired on
July 6, 2007.

(9)

Consists of $90 that we paid for the premiums on a $50,000 term
life insurance policy, of which Mr. Doherty had selected
the beneficiaries.

(10)

Includes three stock options that we granted to Mr. Stewart
during the fiscal year ended December 31, 2006. On
October 5, 2006, we granted Mr. Stewart a stock option
to purchase 275,000 shares of our common stock with an
exercise price of $0.60 per share, one-third of which vested on
March 1, 2007 and the remainder of which vest in 24 equal
monthly installments beginning on April 1, 2007. Also on
October 5, 2006, we granted Mr. Stewart a stock option
to purchase 25,000 shares of our common stock with an
exercise price of $0.60 per share, which vested in 24 equal
semi-monthly installments beginning on July 31, 2006 and
became fully vested as of July 15, 2007. On
October 13, 2006, we granted Mr. Stewart a stock
option to purchase 50,000 shares of our common stock with
an exercise price of $0.60 per share, one-third of which vested
on March 1, 2007 and the remainder of which vest in 24
equal monthly installments beginning on April 1, 2007.

(11)

Consists of $4,567 that we contributed to
Mr. Stewarts 401(k) plan, $108 that we paid for the
premiums on a $50,000 term life insurance policy, of which
Mr. Stewart has selected the beneficiaries, and $7,200 that
we paid to Mr. Stewart as a car allowance.

(12)

Includes one stock option that we granted to Mr. McClead
during the fiscal year ended December 31, 2006. On
October 5, 2006, we granted Mr. McClead a stock option
to purchase 67,500 shares of our common stock with an
exercise price of $0.60 per share, one-third of which vested on
March 1, 2007 and the remainder of which vest in 24 equal
monthly installments beginning on April 1, 2007.

(13)

Consists of $3,355 that we contributed to
Mr. McCleads 401(k) plan and $108 that we paid for
the premiums on a $50,000 term life insurance policy, of which
Mr. McClead has selected the beneficiaries.

The following table sets forth information regarding outstanding
stock options held by our named executive officers at
December 31, 2006.

Equity

Incentive

Plan

Awards:

Number of

Number of

Number of

Securities

Securities

Securities

Underlying

Underlying

Underlying

Option

Unexercised

Unexercised

Unexercised

Exercise

Option

Options (#)

Options (#)

Unearned

Price

Expiration

Name

Exercisable

Unexercisable

Options (#)

($)

Date

Kenneth R. Levine

26,583

2,417

(1)



0.60

2/21/2015

Terry B. Christensen

22,500

2,500

(2)



0.60

5/31/2014

3,281





0.60

10/14/2014

8,940

2,778

(3)



0.60

2/20/2015

27,499

17,501

(4)



0.60

2/20/2015

24,792

27,708

(5)



0.60

6/30/2015

45,000





0.60

10/4/2016



55,000

(6)



0.60

10/4/2016





200,000

(7)

0.60

11/6/2016

Brian E. Doherty



190,000

(8)



0.60

11/6/2016

Howard D. Stewart

7,144





0.60

1/1/2014

3,750





0.60

10/14/2014

16,423

10,452

(9)



0.60

2/20/2015

0

275,000

(10)



0.60

10/4/2016

11,458

13,542

(11)



0.60

10/4/2016



50,000

(12)



0.60

10/12/2016

Seth A. McClead

3,194

1,806

(13)



0.60

2/20/2015

1,388

1,112

(14)



0.60

4/16/2015



67,500

(15)



0.60

10/4/2016

(1)

The shares underlying this option vested in 24 equal monthly
installments beginning on March 21, 2005 and became fully
vested as of February 21, 2007.

(2)

10,000 of the shares underlying this option were vested as of
the date of grant, another 2,500 of the shares vested on
December 1, 2004 and the remaining shares vested in 30
equal monthly installments beginning on January 1, 2005 and
became fully vested as of June 1, 2007.

(3)

4,218 of the shares underlying this option were vested as of the
date of grant, another 1,250 of the shares vested on
April 15, 2005 and the remaining shares vest in 30 equal
monthly installments beginning on May 15, 2005.

(4)

The shares underlying this option vest in 36 equal monthly
installments beginning on March 21, 2005.

(5)

The shares underlying this option vest in 36 equal monthly
installments beginning on August 1, 2005.

(6)

One-third of the shares underlying this option vested on
March 1, 2007 and the remaining shares vest in 24 equal
monthly installments beginning on April 1, 2007.

(7)

The shares underlying this option vest based on the satisfaction
of various performance criteria. 50,000 shares underlying
this option were cancelled on February 1, 2007 because one
of the performance criteria was not met. The remaining shares
are based on performance criteria that must be satisfied by
December 31, 2007.

(8)

One-third of the shares underlying this option vested on
February 17, 2007 and the remaining shares were to vest in
24 equal monthly installments beginning on March 17, 2007.
Following his resignation on April 6, 2007,
Mr. Doherty exercised 60,000 shares underlying this
option on July 6, 2007. The remaining shares were either
canceled upon his resignation because they were unvested or
expired on July 6, 2007.

The shares underlying this option vest in 36 equal monthly
installments beginning on March 21, 2005.

(10)

One-third of the shares underlying this option vested on
March 1, 2007 and the remaining shares vest in 24 equal
monthly installments beginning on April 1, 2007.

(11)

The shares underlying this option vest in 24 equal semi-monthly
installments beginning on July 31, 2006 and became fully
vested as of July 15, 2007.

(12)

One-third of the shares underlying this option vested on
March 1, 2007 and the remaining shares vest in 24 equal
monthly installments beginning on April 1, 2007.

(13)

One-sixth of the shares underlying this option vested on
July 3, 2005 and the remaining shares vest in 30 equal
monthly installments beginning on August 3, 2005.

(14)

One-third of the shares underlying this option vested on
April 17, 2006 and the remaining shares vest in 24 equal
monthly installments beginning on May 17, 2006.

(15)

One-third of the shares underlying this option vested on
March 1, 2007 and the remaining shares vest in 24 equal
monthly installments beginning on April 1, 2007.

Employment
Agreements

John M.
Parsons

We are a party to an employment agreement, dated July 12,
2007, with John M. Parsons, our Chief Financial Officer. In
connection with this employment agreement, we also entered into
a resources agreement with Tatum, LLC, or Tatum, an executive
services firm in which Mr. Parsons is a partner. Under the
agreements, Mr. Parsons has agreed to serve as our Chief
Financial Officer on a full time basis, but will remain as a
partner in Tatum and will continue to have access to the
resources provided by Tatum. Mr. Parsons and Tatum assisted
us with financial matters on a consulting basis between April
2007 and the time we entered into the agreements.

Under the agreements, we agreed to pay a total salary of $36,500
a month, approximately 83.3% of which is paid directly to
Mr. Parsons and the remainder of which is paid to Tatum
during the first two years. In addition, we agreed to pay
Mr. Parsons a cash bonus of $25,000 upon the initial filing
of the registration statement of which this prospectus is a
part, and a second cash bonus of $25,000 upon the effectiveness
of the registration statement. 15% of these cash bonuses and any
other cash bonuses we decide to grant Mr. Parsons will be
paid to Tatum. In addition, on July 23, 2007, we granted
Mr. Parsons an incentive stock option to purchase
337,735 shares of our common stock at $0.93 per share,
which our board of directors determined to be the fair market
value on the date of grant. One-third of the shares underlying
the stock option became exercisable as of the date of grant,
another one-third of the shares will become exercisable on
December 31, 2007 and the final one-third of the shares
will become exercisable on December 31, 2008. If we
terminate Mr. Parsons without cause (as defined in the
employment agreement) between October 1, 2008 and
December 31, 2008, the final one-third of the shares will
become exercisable immediately prior to such termination.
Mr. Parsons has agreed to give Tatum 15% of any cash
proceeds that he receives from the stock option and any other
equity that we may grant him.

Mr. Parsons has waived our health and medical benefits and
will instead continue to receive health and medical benefits
from Tatum. We will reimburse Mr. Parsons up to $1,000 per
month for amounts paid by him to Tatum for such benefits.

If we terminate Mr. Parsons without cause on or before
January 1, 2008, we have agreed to pay him his salary for
two months following such termination. If we terminate
Mr. Parsons without cause after January 1, 2008, we
have agreed to pay him an aggregate of $50,000 over a
three-month period.

Subject to limited exceptions, we have agreed not to employ
Mr. Parsons or engage him as an independent contractor for
a period of twelve months following the termination of the
resources agreement with Tatum. If we do so, we have agreed to
pay Tatum an amount equal to 45% of the sum of
Mr. Parsons portion of his annualized salary at the
time of hiring and the maximum amount of any bonus for which
Mr. Parsons was eligible during the bonus year in which the
hiring occurred.

We are party to an employment agreement, dated December 1,
2004, with Howard D. Stewart, our Executive Vice President of
Engineering and a director. Under this agreement, which has a
three-year term, we agreed to pay Mr. Stewart an annual
base salary of $160,000, subject to increase at the discretion
of our board of directors. Our board of directors may also grant
Mr. Stewart a cash bonus, in its sole discretion, based on
milestones that it may set. Mr. Stewart is entitled to
receive a car allowance of $600 per month. The agreement also
includes a covenant by Mr. Stewart not to compete with our
business or to solicit any of our employees or customers during
the two-year period following his employment termination. If we
terminate Mr. Stewarts employment without cause, the
agreement provides for him to receive severance equal to two
times his annual base salary in return for Mr. Stewart
executing a general release of claims against us. If
Mr. Stewart terminates his employment for good reason (as
defined in the employment agreement), Mr. Stewart will be
entitled to have his base salary and benefits continued for two
years following his employment termination. In addition, if we
ask Mr. Stewart to relocate his residence and place of
employment from Idaho Falls, Idaho and Mr. Stewart does not
consent, Mr. Stewart is entitled to terminate the agreement
and receive a lump sum severance payment equal to $250,000.

Terry B.
Christensen

On February 15, 2006, we entered into a transition
agreement with Terry B. Christensen pursuant to which we
mutually agreed to terminate the employment agreement that we
had previously entered into with Mr. Christensen. In return
for severance payments and option grants that have already been
made, Mr. Christensen agreed to continue to serve in the
capacity of President and Chief Executive Officer on an
at-will basis until a suitable replacement was
identified and hired. Mr. Levine has assumed the positions
of President and Chief Executive Officer, and
Mr. Christensen is now serving as our Executive Vice
President of Business Development. Pursuant to the transition
agreement with Mr. Christensen, certain of his stock option
grants will become fully vested upon termination of his
employment. As of June 30, 2007, options to purchase
30,695 shares of our common stock that are currently
unvested would become vested in full if
Mr. Christensens employment were to be terminated.

Acceleration
of Stock Options

We have entered into stock option agreements with
Mr. Christensen and Seth A. McClead, our Executive Vice
President of Operations and Secretary, that provide for
acceleration of any unvested shares underlying such stock
options upon the earlier of the closing of an initial public
offering or a change in control. Upon the closing of this
offering, 30,695 shares underlying stock options held by
Mr. Christensen that were unvested as of June 30, 2007
will become exercisable and 972 shares underlying stock
options held by Mr. McClead that were unvested as of
June 30, 2007 will become exercisable.

Other than as described above, we do not have any formal
employment, severance or change in control agreements with any
of our other executive officers. Each executive officer has also
entered into a non-competition, non-solicitation, proprietary
information and invention assignment agreement. Under these
agreements, each executive officer has agreed (1) not to
compete with us or to solicit our employees during their
employment and for a period of one year after the termination of
their employment and (2) to protect our confidential and
proprietary information and to assign intellectual property
developed during the course of their employment to us.

Stock
Option and Other Compensation Plans

1999
Stock Option Plan

Our 1999 Stock Option Plan, which we refer to as the 1999 stock
plan, was adopted by our board of directors in November 1999 and
approved by our stockholders in December 1999. A maximum of
80,000 shares of common stock were issuable under the 1999
stock plan. As of June 30, 2007, options to purchase an
aggregate of 22,146 shares of common stock at a weighted
average exercise price of $0.60 per share were outstanding under
the 1999 stock plan, all of which were exercisable. Following
adoption of our

2005 Stock Incentive Plan in February 2005, no further option
grants were able to be made under the 1999 stock plan.

2000
Stock Option Plan

Our 2000 Stock Option Plan, which we refer to as the 2000 stock
plan, was adopted by our board of directors and approved by our
stockholders in July 2000. A maximum of 250,000 shares of
common stock were issuable under the 2000 stock plan. As of
June 30, 2007, options to purchase an aggregate of
69,739 shares of common stock at a weighted average
exercise price of $0.60 per share were outstanding under the
2000 stock plan, 69,320 of which were exercisable. Upon closing
of this offering, 419 shares underlying stock options
granted under the 2000 stock plan that were unvested as of
June 30, 2007 will become exercisable. Following adoption
of our 2005 Stock Incentive Plan in February 2005, no further
option grants were able to be made under the 2000 stock plan.

2005
Stock Incentive Plan

Our 2005 Stock Incentive Plan, as amended, which we refer to as
the 2005 stock plan, was adopted by our board of directors and
approved by our stockholders in February 2005. A maximum of
3,263,823 shares of common stock are authorized for
issuance under the 2005 stock plan.

The 2005 stock plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock and other
stock-based awards. Our employees, officers, directors,
consultants and advisors are eligible to receive awards under
the 2005 stock plan; however, incentive stock options may only
be granted to our employees. In accordance with the terms of the
2005 stock plan, our board of directors, or a committee or
subcommittee appointed by our board of directors, administers
the 2005 stock plan and, subject to any limitations in the 2005
stock plan, selects the recipients of awards and determines:



the number of shares of common stock covered by options and the
dates upon which those options become exercisable;



the exercise prices of options;



the duration of options;



the methods of payment of the exercise price; and



the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of those awards, including the conditions for repurchase, issue
price and repurchase price.

Upon a merger or other reorganization event, our board of
directors, may, in their sole discretion, take any one or more
of the following actions pursuant to our 2005 stock incentive
plan, as to some or all outstanding awards, other than
restricted stock awards:



provide that all outstanding awards shall be assumed or
substituted by the successor corporation;



upon written notice to a participant, provide that the
participants unexercised options or awards will become
exercisable in full and terminate immediately prior to the
consummation of such transaction unless exercised by the
participant;



provide that outstanding awards will become realizable or
deliverable, or restrictions applicable to an award will lapse,
in whole or in part, prior to or upon the reorganization event;



in the event of a reorganization event pursuant to which holders
of our common stock will receive a cash payment for each share
surrendered in the reorganization event, make or provide for a
cash payment to the participants equal to the excess, if any, of
the acquisition price times the number of shares of our common
stock subject to such outstanding awards (to the extent then
exercisable at prices not in excess of the acquisition price),
over the aggregate exercise price of all such outstanding awards
and any applicable tax withholdings, in exchange for the
termination of such awards; and

provide that, in connection with a liquidation or dissolution,
awards will convert into the right to receive liquidation
proceeds.

Upon the occurrence of a reorganization event other than a
liquidation or dissolution, the repurchase and other rights
under each outstanding restricted stock award will continue for
the benefit of the successor company and will apply to the cash,
securities or other property into which our common stock is
converted pursuant to the reorganization event. Upon the
occurrence of a reorganization event involving a liquidation or
dissolution, all conditions on each outstanding restricted stock
award will automatically be deemed terminated or satisfied,
unless otherwise provided in the agreement evidencing the
restricted stock award.

As of June 30, 2007, there were options to purchase
2,490,441 shares of common stock outstanding under the 2005
stock plan at a weighted average exercise price of $0.60 per
share, 1,144,250 of which were exercisable. Upon closing of this
offering, 35,689 shares underlying stock options granted
under the 2005 stock plan that were unvested as of June 30,
2007 will become exercisable. 60,000 shares of common stock
have been issued pursuant to the exercise of options granted
under the 2005 stock plan. After the effective date of the 2007
stock incentive plan described below, we will grant no further
stock options or other awards under the 2005 stock plan.
However, any shares of common stock reserved for issuance under
the 2005 stock plan that remain available for issuance and any
shares of common stock subject to awards under the 2005 stock
plan that expire, terminate or are otherwise surrendered,
canceled, forfeited or repurchased by us will be added to the
number of shares available under the 2007 stock incentive plan
up to a specified number of shares.

2007
Stock Incentive Plan

Our 2007 stock incentive plan, which will become effective on
the date that the registration statement for this offering is
declared effective, was adopted by our board of directors
on ,
2007 and approved by our stockholders
on ,
2007. The 2007 stock incentive plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted
stock awards and other stock-based awards. Upon effectiveness of
the plan, the number of shares of common stock that will be
reserved for issuance under the 2007 stock incentive plan will
be the sum
of shares
plus the number of shares of common stock then available for
issuance under the 2005 stock plan and the number of shares of
common stock subject to awards granted under the 2005 stock plan
which expire, terminate or are otherwise surrendered, cancelled,
forfeited or repurchased by us at their original issuance price
pursuant to a contractual repurchase right, up to a maximum
of shares.

In addition, our 2007 stock incentive plan contains an
evergreen provision that allows for an annual
increase in the number of shares available for issuance under
our 2007 stock incentive plan on the first day of each fiscal
year beginning in fiscal year 2009 and ending on the second day
of fiscal year 2017. The annual increase in the number of shares
shall be equal to the lowest of:



shares;



% of the aggregate number of
shares of common stock outstanding on the first day of the
fiscal year; and



an amount determined by our board of directors.

Our employees, officers, directors, consultants and advisors are
eligible to receive awards under our 2007 stock incentive plan;
however, incentive stock options may only be granted to our
employees. The maximum number of shares of common stock with
respect to which awards may be granted to any participant under
the plan
is
per calendar year.

In accordance with the terms of the 2007 stock incentive plan,
our board of directors has authorized our compensation committee
to administer the 2007 stock incentive plan. Pursuant to the
terms of the 2007 stock incentive plan, our compensation
committee will select the recipients of awards and determine:



the number of shares of common stock covered by options and the
dates upon which the options become exercisable;

the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of such awards, including conditions for repurchase, issue price
and repurchase price.

If our board of directors delegates authority to an executive
officer to grant awards under the 2007 stock incentive plan, the
executive officer has the power to make awards to all of our
employees, except executive officers. Our board of directors
will fix the terms of the awards to be granted by such executive
officer, including the exercise price of such awards and the
maximum number of shares subject to awards that such executive
officer may make.

Upon a merger or other reorganization event, our board of
directors, may, in their sole discretion, take any one or more
of the following actions pursuant to our 2007 stock incentive
plan, as to some or all outstanding awards:



provide that all outstanding awards shall be assumed or
substituted by the successor corporation;



upon written notice to a participant, provide that the
participants unexercised options or awards will terminate
immediately prior to the consummation of such transaction unless
exercised by the participant;



provide that outstanding awards will become exercisable,
realizable or deliverable, or restrictions applicable to an
award will lapse, in whole or in part, prior to or upon the
reorganization event;



in the event of a reorganization event pursuant to which holders
of our common stock will receive a cash payment for each share
surrendered in the reorganization event, make or provide for a
cash payment to the participants equal to the excess, if any, of
the acquisition price times the number of shares of our common
stock subject to such outstanding awards (to the extent then
exercisable at prices not in excess of the acquisition price),
over the aggregate exercise price of all such outstanding awards
and any applicable tax withholdings, in exchange for the
termination of such awards; and



provide that, in connection with a liquidation or dissolution,
awards convert into the right to receive liquidation proceeds.

Upon the occurrence of a reorganization event other than a
liquidation or dissolution, the repurchase and other rights
under each outstanding restricted stock award will continue for
the benefit of the successor company and will, unless the board
of directors may otherwise determine, apply to the cash,
securities or other property into which our common stock is
converted pursuant to the reorganization event. Upon the
occurrence of a reorganization event involving a liquidation or
dissolution, all conditions on each outstanding restricted stock
award will automatically be deemed terminated or satisfied,
unless otherwise provided in the agreement evidencing the
restricted stock award.

No award may be granted under the 2007 stock incentive plan
after ,
2017. Our board of directors may amend, suspend or terminate the
2007 stock incentive plan at any time, except that stockholder
approval will be required to comply with applicable law or stock
market requirements.

Limitations
on Officers and Directors Liability and
Indemnification Agreements

As permitted by Delaware law, we have adopted provisions in our
restated certificate of incorporation and amended and restated
by-laws, both of which will become effective following the
effectiveness of the registration statement of which this
prospectus is a part, that limit or eliminate the personal
liability of our directors. Our restated certificate of
incorporation and amended and restated by-laws limit the
liability of our directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a

corporation will not be personally liable for monetary damages
for breaches of their fiduciary duties as directors, except
liability for:



any breach of the directors duty of loyalty to us or our
stockholders;



any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;



any unlawful payments related to dividends or unlawful stock
repurchases, redemptions or other distributions; or



any transaction from which the director derived an improper
personal benefit.

These limitations do not apply to liabilities arising under
federal securities laws and do not affect the availability of
equitable remedies, including injunctive relief or rescission.
If Delaware law is amended to authorize the further elimination
or limitation of liability of a director, then the liability of
our directors will be eliminated or limited to the fullest
extent permitted by Delaware law, as so amended.

As permitted by Delaware law, our restated certificate of
incorporation and amended and restated by-laws also provide that:



we will indemnify our directors and officers to the fullest
extent permitted by law;



we may indemnify our other employees and other agents to the
same extent that we indemnify our officers and directors, unless
otherwise determined by the board of directors; and



we will advance expenses to our directors and executive officers
in connection with legal proceedings in connection with a legal
proceeding to the fullest extent permitted by law.

The indemnification provisions contained in our restated
certificate of incorporation and amended and restated by-laws
are not exclusive.

In addition to the indemnification provided for in our restated
certificate of incorporation and amended and restated by-laws,
we have entered into indemnification agreements with some of our
directors and, prior to the closing of this offering, intend to
enter into indemnification agreements with the remaining
directors and each of our executive officers. Each
indemnification agreement will provide that we will indemnify
the director or executive officer to the fullest extent
permitted by law for claims arising in his or her capacity as
our director, officer, employee or agent, provided that he or
she acted in good faith and in a manner that he or she
reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal proceeding, had no
reasonable cause to believe that his or her conduct was
unlawful. In the event that we do not assume the defense of a
claim against a director or executive officer, we are required
to advance his or her expenses in connection with his or her
defense, provided that he or she undertakes to repay all amounts
advanced if it is ultimately determined that he or she is not
entitled to be indemnified by us.

We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive
officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers
or persons controlling our company pursuant to the foregoing
provisions, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.

In addition, we maintain standard policies of insurance under
which coverage is provided to our directors and officers against
losses rising from claims made by reason of breach of duty or
other wrongful act, and to us with respect to payments which may
be made by us to such directors and officers pursuant to the
above indemnification provisions or otherwise as a matter of law.

Since January 1, 2005, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our voting securities, and their respective
affiliates. We believe that all of the transactions described
below were made on terms no less favorable to us than could have
been obtained from unaffiliated third parties.

Series B
Preferred Stock Financing

On February 22, 2005, we issued an aggregate of
492,413 shares of Series B preferred stock and
corresponding warrants to purchase shares of Series B
preferred stock to twenty-six investors for an aggregate
purchase price of $6,499,960.50. Each share of Series B
preferred stock was sold with a corresponding warrant to
purchase 0.8 shares of Series B preferred stock for an
aggregate purchase price of $13.20. All of the warrants to
purchase shares of Series B preferred stock were terminated
on January 12, 2006 in connection with the initial closing
of our Series C preferred stock financing. The following
directors, executive officers and 5% stockholders, and their
respective affiliates, participated in this financing (omitting
reference to the corresponding warrants that were issued and
later terminated):

Kenneth R. Levine, our President, Chief Executive Officer and
Chairman of the Board, purchased 44,333 shares of
Series B preferred stock for an aggregate purchase price of
$585,198.90. On December 20, 2005, Mr. Levine
transferred these shares to Brookline Venture Partners I,
LLC, of which Mr. Levine is a partner.

In July, November and December 2005, we issued convertible
secured promissory notes to twelve investors in an aggregate
principal amount of $3,850,000. The promissory notes bore
interest at an annual rate of 8% and converted into an aggregate
of 3,189,314 shares of Series C preferred stock on
January 12, 2006 in connection with the initial closing of
our Series C preferred stock financing. The promissory
notes issued in July 2005 (representing $2,350,000 of the
aggregate principal amount) converted into Series C
preferred stock at a discount of 15% off the per share sales
price for Series C preferred stock ($1.19 after the
discount) and the promissory notes issued in November and
December 2005 (representing $1,500,000 of the aggregate
principal amount) converted at a 5% discount ($1.33 after the
discount). We issued promissory notes to the following
directors, executive officers and 5% stockholders, and their
respective affiliates:



We issued FA Private Equity Fund IV, L.P. convertible
secured promissory notes on July 26, 2005, November 8,
2005 and December 27, 2005 in the principal amounts of
$360,000, $331,200 and $100,800, respectively, which were
collectively converted into 642,419 shares of Series C
preferred

stock on January 12, 2006. We issued FA Private Equity
Fund IV GmbH & Co. Beteiligungs KG convertible
secured promissory notes on July 26, 2005, November 8,
2005 and December 27, 2005 in the principal amounts of
$15,000, $13,800 and $4,200, respectively, which were
collectively converted into 26,767 shares of Series C
preferred stock on January 12, 2006. We issued The
Productivity Fund IV, L.P. convertible secured promissory
notes on July 26, 2005, November 8, 2005 and
December 27, 2005 in the principal amounts of $240,740,
$221,481 and $67,407, respectively, which were collectively
converted into 429,600 shares of Series C preferred
stock on January 12, 2006. We issued The Productivity
Fund IV Advisors Fund, L.P. convertible secured promissory
notes on July 26, 2005, November 8, 2005 and
December 27, 2005 in the principal amounts of $9,260,
$8,519 and $2,593, respectively, which were collectively
converted into 16,524 shares of Series C preferred
stock on January 12, 2006.



We issued Brookline Venture Partners I, LLC convertible
secured promissory notes on July 26, 2005, November 9,
2005 and December 27, 2005 in the principal amounts of
$1,200,000, $575,000 and $175,000, respectively, which were
collectively converted into 1,616,411 shares of
Series C preferred stock on January 12, 2006.

Short
Term Loan

On January 11, 2006, Brookline Venture Partners I, LLC
and First Analysis Corporation loaned us an aggregate of
$350,000 in order to meet the payroll that was due on such date.
We repaid this loan out of the proceeds of the initial closing
of the Series C preferred stock financing on
January 12, 2006.

Series C
Preferred Stock Financing

On January 12, 2006, we issued 3,214,287 shares of
Series C preferred stock at $1.40 per share to Ascent
Venture Partners IV-A, L.P., which we refer to as Ascent, for an
aggregate purchase price of $4,499,999.98. In addition, all
principal and interest due under the convertible secured
promissory notes referenced above under  2005
Bridge Financing converted into an aggregate of
3,189,314 shares of Series C preferred stock. In
connection with the initial closing of the Series C
preferred stock financing on January 12, 2006, Brookline
Venture Partners I, LLC, FA Private Equity Fund IV,
L.P., FA Private Equity Fund IV GmbH & Co.
Beteiligungs KG, The Productivity Fund IV, L.P. and The
Productivity Fund IV Advisors Fund, L.P. placed an
aggregate of $2,650,000 in escrow, which was only to be released
and used to purchase shares of Series C preferred stock if
we had not sold such amount of Series C preferred stock in
a rights offering to our other stockholders by certain dates. We
did not sell any additional shares of Series C preferred
stock by those given dates, which resulted in the entire
$2,650,000 in escrow being released and used to purchase shares
of Series C preferred stock at $1.40 per share. In
connection with the release of the escrow funds:



FA Private Equity Fund IV, L.P. purchased
205,713 shares of Series C preferred stock on
February 27, 2006 and 339,429 shares of Series C
preferred stock on April 12, 2006. FA Private Equity
Fund IV GmbH & Co. Beteiligungs KG purchased
8,570 shares of Series C preferred stock on
February 27, 2006 and 14,143 shares of Series C
preferred stock on April 12, 2006. The Productivity
Fund IV, L.P. purchased 137,571 shares of
Series C preferred stock on February 27, 2006 and
226,993 shares of Series C preferred stock on
April 12, 2006. The Productivity Fund IV Advisors
Fund, L.P. purchased 5,286 shares of Series C
preferred stock on February 27, 2006 and 8,721 shares
of Series C preferred stock on April 12, 2006.



Brookline Venture Partners I, LLC purchased
357,143 shares of Series C preferred stock on
February 27, 2006 and 589,286 shares of Series C
preferred stock on April 12, 2006.

Series C
Preferred Stock Rights Offering

On September 8, 2006, we completed a rights offering to our
stockholders and issued 1,402,834 shares of Series C
preferred stock at $1.40 per share to fourteen investors for an
aggregate purchase price of

In November and December 2006, we issued convertible unsecured
promissory notes to five investors in an aggregate principal
amount of $1,000,000. The promissory notes bear interest at an
annual rate of 8% and are convertible into Series C
preferred stock at a discount of 15% off the per share sales
price for Series C preferred stock ($1.19 after the
discount). We expect that the principal and interest due under
these promissory notes will be voluntarily converted into shares
of Series C preferred stock prior to the effectiveness of
the registration statement of which this prospectus is a part.
We issued these promissory notes to the following directors,
executive officers and 5% stockholders, and their respective
affiliates:

We issued a convertible unsecured promissory note to Brookline
Venture Partners I, LLC in the aggregate principal amount
of $750,000.

January
2007 Bridge Financing

In January 2007, we issued convertible unsecured promissory
notes to five investors in an aggregate principal amount of
$1,000,000. The promissory notes bore interest at an annual rate
of 8% and were convertible into Series C preferred stock at
a discount of 15% off the per share sales price for
Series C preferred stock ($1.19 after the discount). All of
the principal and interest due under these promissory notes was
converted into Series C preferred stock on April 25,
2007 in connection with the initial closing of our Series C
preferred stock private placement (as described below). We
issued these promissory notes to the following directors,
executive officers and 5% stockholders, and their respective
affiliates:



We issued a convertible unsecured promissory note to FA Private
Equity Fund IV, L.P. in the aggregate principal amount of
$288,000, which was converted into 245,676 shares of
Series C preferred stock on April 25, 2007. We issued
a convertible unsecured promissory note to FA Private Equity
Fund IV GmbH & Co. Beteiligungs KG in the
aggregate principal amount of $12,000, which was converted into
10,236 shares of Series C preferred stock on
April 25, 2007. We issued a convertible unsecured
promissory note to The Productivity Fund IV, L.P. in the
aggregate principal amount of $192,592, which was converted into
164,289 shares of Series C preferred stock on
April 25, 2007. We issued a

convertible unsecured promissory note to The Productivity
Fund IV Advisors Fund, L.P. in the aggregate principal
amount of $7,408, which was converted into 6,319 shares of
Series C preferred stock on April 25, 2007.



We issued a convertible unsecured promissory note to Brookline
Venture Partners I, LLC in the aggregate principal amount
of $500,000, which was converted into 426,522 shares of
Series C preferred stock on April 25, 2007.

Series C
Preferred Stock Private Placement

In April and May 2007, we conducted a private placement of our
Series C preferred stock and issued 1,227,191 shares
of Series C preferred stock at $1.40 per share to 26
investors for an aggregate purchase price of $1,718,067.40. The
following affiliates of our directors, executive officers and 5%
stockholders purchased Series C preferred stock in the
private placement:

Aureus, LC purchased 101,464 shares of Series C
preferred stock for an aggregate purchase price of $142,049.60.
Les V. Anderton, the father of Terry B. Christensen, our former
President and Chief Executive Officer, is the sole manager of
Aureus, LC.

We paid a commission of $31,302.53 to Wilson-Davis &
Co., Inc. in connection with the private placement, which was
equal to 5% of all of the funds raised from investors that
Wilson-Davis & Co. had contacted. Les V. Anderton is a
broker at Wilson-Davis & Co., Inc.

July 2007
Bridge Financing

In July 2007, we issued convertible unsecured promissory notes
to five investors in an aggregate principal amount of
$2,000,000. The promissory notes bear interest at an annual rate
of 8% and are convertible into Series C preferred stock at
a discount of 15% off the per share sales price for
Series C preferred stock ($1.19 after the discount). All of
the principal and interest due under these promissory notes will
become due upon the closing of this offering and will be paid
out of the proceeds. We issued these promissory notes to the
following directors, executive officers and 5% stockholders, and
their respective affiliates:

We issued a convertible unsecured promissory note to Brookline
Venture Partners I, LLC in the aggregate principal amount
of $1,000,000.

Conversion
of Accruing Dividend on Series C Preferred Stock

Each share of our Series C preferred stock accrues a
dividend at an annual rate of 8% of the original issue price of
the Series C preferred stock. The dividend accrues from the
date that we originally issued each share and is compounded
annually. The original issue price of our Series C
preferred stock is defined as $1.40 in our restated certificate
of incorporation that will be in effect prior to the
effectiveness of the registration statement of which this
prospectus is a part. The dividend may be paid in cash or shares
of common stock at

our election upon the effectiveness of the registration
statement of which this prospectus is a part. As a result, upon
effectiveness of the registration statement of which this
prospectus is a part, we expect that:



We will
issue shares
of common stock to FA Private Equity Fund IV, L.P. based on
an accrued dividend of
$ , shares
of common stock to FA Private Equity Fund IV
GmbH & Co. Beteiligungs KG based on an accrued
dividend of
$ , shares
of common stock to The Productivity Fund IV, L.P. based on
an accrued dividend of $
and shares
of common stock to The Productivity Fund IV Advisors Fund,
L.P. based on an accrued dividend of
$ .



We will
issue shares
of common stock to Brookline Venture Partners I, LLC based
on an accrued dividend of $ .



We will
issue shares
of common stock to S. Robert Levine based on an accrued dividend
of $ .



We will
issue shares
of common stock to The Kenneth R. Levine GRAT  2002
DTD 11/25/02
based on an accrued dividend of $ .



We will
issue shares
of common stock to Faye Levine based on an accrued dividend of
$ .



We will
issue shares
of common stock to Alvin Z. Meisel based on an accrued dividend
of $ .



We will
issue shares
of common stock to Aureus, LC based on an accrued dividend of
$ .

Sale of
Products

In January 2006, we sold products and services to AdVentures,
Inc. for approximately $49,000. Kenneth R. Levine is an investor
in and a current director and former interim chief executive
officer of AdVentures, Inc.

In December 2005 and February 2007, we sold products and
services to First Analysis Corporation for an aggregate of
approximately $14,500.

Employment
of Relatives of Related Persons

Brian H. Stewart, the son of Howard D. Stewart, our Executive
Vice President of Engineering and a director, has been employed
by us since April 2005 as a Software Development Engineer and
earned total compensation of $26,657.18 and $49,999.92 for the
years ended December 31, 2005 and 2006, respectively.

Chelsi Christensen, the sister of Mr. Christensen, was
employed by us from June 2004 to August 2006 as Regional
Manager, Mountain Region, and earned total compensation of
$82,921.93 and $91,857.32 for the years ended December 31,
2005 and 2006, respectively.

Tatum,
LLC

John M. Parsons, our Chief Financial Officer, is also a
partner in Tatum, an executive services firm that has assisted
us with financial matters since April 2007. As of June 30,
2007, we had paid Tatum $195,200 for services rendered during
2007. See Management  Employment
Agreements  John M. Parsons regarding payments
that we continue to make to Tatum.

Norman J. Rice, III, who joined our board of directors in
July 2007, is the Managing Partner of Dawn Patrol, LLC. Since
October 2006, Dawn Patrol, LLC has consulted for Brookline
Venture Partners I, LLC with respect to companies in which
Brookline Venture Partners I, LLC has invested, including
our company.

Mr. Levine, our President, Chief Executive Officer and
Chairman of the Board, is a partner of Brookline Venture
Partners I, LLC. For such consulting services, Brookline Venture
Partners I, LLC pays Dawn Patrol, LLC a fee of $5,000 per
month. In addition, Brookline Venture Partners I, LLC has
agreed to pay Dawn Patrol, LLC 5% percent of any profits
that Brookline Venture Partners I, LLC receives as a result
of its investment in our company, after repayment of invested
capital and less any applicable taxes and transaction expenses
payable by Brookline Venture Partners I, LLC.

Amended
and Restated Stockholders Agreement

We have entered into an amended and restated stockholders
agreement with all of the holders of our preferred stock and
some of the holders of our common stock. Our board of directors
currently consists of four members, all of whom were elected as
directors pursuant to the board composition provisions of the
amended and restated stockholders agreement. The board
composition provisions of the amended and restated stockholders
agreement will terminate upon the effectiveness of the
registration statement of which this prospectus is a part and
there will be no further contractual obligations regarding the
election of our directors.

Amended
and Restated Registration Agreement

We have entered into an amended and restated registration
agreement with the holders of our preferred stock and warrants
to purchase our preferred stock. The amended and restated
registration agreement provides that holders of our preferred
stock have the right to demand that we file a registration
statement or request that their shares be covered by a
registration statement that we are otherwise filing. For a more
detailed description of these registration rights, see
Description of Securities  Registration
Rights.

The amended and restated registration agreement also contains a
right of first refusal provision that provides that we cannot
issue certain securities unless we first offer such securities
to holders of our preferred stock in accordance with the
agreement. The right of first refusal provision of the amended
and restated registration agreement will terminate upon the
effectiveness of the registration statement of which this
prospectus is a part and will not apply to this offering.

Indemnification
Agreements

Our restated certificate of incorporation that will become
effective following the effectiveness of the registration
statement of which this prospectus is a part provides that we
will indemnify our directors and officers to the fullest extent
permitted by Delaware law. In addition, we expect to enter into
indemnification agreements with each of our directors and
executive officers that may be broader in scope than the
specific indemnification provisions contained in the Delaware
General Corporation Law. For more information regarding these
agreements, see Management  Limitations on
Officers and Directors Liability and Indemnification
Agreements.

Policies
and Procedures for Related Person Transactions

On ,
2007, our board of directors adopted a written related person
transaction policy to set forth the policies and procedures for
the review and approval or ratification of related person
transactions. This policy covers any transaction, arrangement or
relationship, or any series of similar transactions,
arrangements or relationships in which we were or are to be a
participant, the amount involved exceeds the lesser of $120,000
and 1% of the average of our total assets at year-end for the
last three completed fiscal years, and a related person had or
will have a direct or indirect material interest, including,
without limitation, purchases of goods or services by or from
the related person or entities in which the related person has a
material interest, indebtedness, guarantees of indebtedness and
employment by us of a related person.

Any related person transaction proposed to be entered into by us
must be reported to and will be reviewed and approved by our
audit committee in accordance with the terms of the policy,
prior to effectiveness or consummation of the transaction,
whenever practicable. If the audit committee determines that
advance approval of a related person transaction is not
practicable under the circumstances, the audit committee will
review and, in its discretion, may ratify the related person
transaction at the next meeting of the audit

committee, or at the next meeting following the date that the
related person transaction comes to its attention. We, however,
may present a related person transaction arising in the time
period between meetings of the audit committee to the chair of
the audit committee, who will review and may approve the related
person transaction, subject to ratification by the audit
committee at the next meeting of the audit committee.

In addition, any related person transaction previously approved
by the audit committee or otherwise already existing that is
ongoing in nature will be reviewed by the audit committee
annually to ensure that such related person transaction has been
conducted in accordance with the previous approval granted by
the audit committee, if any, and that all required disclosures
regarding the related person transaction are made.

Transactions involving compensation of executive officers will
be reviewed and approved by the compensation committee in the
manner specified in the charter of the compensation committee.

A related person transaction reviewed under this policy will be
considered approved or ratified if it is authorized by the audit
committee in accordance with the standards set forth in this
policy after full disclosure of the related persons
interests in the transaction. As appropriate for the
circumstances, the audit committee will review and consider:



the related persons interest in the related person
transaction;



the approximate dollar value of the amount involved in the
related person transaction;



the approximate dollar value of the amount of the related
persons interest in the transaction without regard to the
amount of any profit or loss;



whether the transaction was undertaken in the ordinary course of
business;



whether the transaction with the related person is proposed to
be, or was, entered into on terms no less favorable to us than
terms that could have been reached with an unrelated third party;



the purpose of, and the potential benefits to us of, the
transaction; and



any other information regarding the related person transaction
or the related person in the context of the proposed transaction
that would be material to investors in light of the
circumstances of the particular transaction.

The audit committee will review all relevant information
available to it about the related person transaction. The audit
committee may approve or ratify the related person transaction
only if the audit committee determines that, under all of the
circumstances, the transaction is in or is not inconsistent with
our best interests. The audit committee may, in its sole
discretion, impose conditions as it deems appropriate on us or
the related person in connection with approval of the related
person transaction.

The following table sets forth information regarding the
beneficial ownership of our common shares as of August 9,
2007:



each person, or group of affiliated persons, known by us to be
the beneficial owner of more than 5% of our common stock;



each of our named executive officers;



each of our directors; and



all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules
of the SEC. These rules generally attribute beneficial ownership
of securities to persons who possess sole or shared voting power
or investment power with respect to those securities and include
shares of common stock issuable upon exercise of stock options
that are immediately exercisable or exercisable within
60 days after August 9, 2007. Except as otherwise
indicated, all of the shares reflected in the table are shares
of common stock and all persons listed below have sole voting
and investment power with respect to the shares beneficially
owned by them, subject to applicable community property laws.
The information is not necessarily indicative of beneficial
ownership for any other purpose.

Percentage ownership calculations for beneficial ownership prior
to this offering are based
on shares
of common stock outstanding as of August 9, 2007, assuming
(i) the conversion of all preferred stock into common
stock, (2) the conversion of principal and interest due
under promissory notes issued in July 2005 and (3) the
payment in the form of common stock of the dividends accruing on
our Series C preferred stock. Percentage ownership
calculations for beneficial ownership after this offering also
include the shares of common stock included in the units we are
offering hereby, but do not include any shares of common stock
included in the units that may be sold as a result of the
exercise of the over-allotment option granted to the
underwriters or the underwriters warrants. Except as
otherwise indicated in the table below, addresses of named
beneficial owners are in care of NitroSecurity, Inc., 230
Commerce Way, Suite 325, Portsmouth, NH 03801.

In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person,
we deemed outstanding shares of common stock subject to options
held by that person that are currently exercisable or
exercisable within 60 days of August 9, 2007. We did
not deem these shares outstanding, however, for the purpose of
computing the percentage ownership of any other person.
Beneficial ownership representing less than 1% is denoted with
an asterisk (*).

The address for First Analysis Corporation is One South Wacker
Drive, Suite 3900, Chicago, IL 60606. Consists
of shares
held by FA Private Equity Fund IV,
L.P., shares
held by FA Private Equity Fund IV GmbH & Co.
Beteiligungs
KG, shares
held by The Productivity Fund IV, L.P.
and shares
held by The Productivity Fund IV Advisors Fund, L.P. First
Analysis Corporation is the managing entity of FA Private Equity
Fund IV, L.P., FA Private Equity Fund IV
GmbH & Co. Beteiligungs KG, The Productivity
Fund IV, L.P. and The Productivity Fund IV Advisors
Fund, L.P. and has voting and investment power over the shares
held by such entities.

(3)

Consists of
(i) shares
issuable to Mr. Levine upon exercise of stock options,
(ii) shares
held by Brookline Venture Partners I, LLC, of which
Mr. Levine is a partner, and
(iii) shares
held by The Kenneth R. Levine GRAT  2002 DTD
11/25/02, over which Mr. Levine has investment control.

(4)

Consists of
(i) shares
issuable to Mr. Christensen upon exercise of stock options
and
(ii) shares
held by Trunity, LLC, of which Mr. Christensen is a member.

(5)

Consists
of shares
issuable to Mr. Doherty upon exercise of stock options.

(6)

Includes shares
issuable to Mr. Stewart upon exercise of stock options.

(7)

Consists
of shares
issuable to Mr. McClead upon exercise of stock options.

All of the shares of common stock set forth in the above table
are covered by
lock-up
agreements prohibiting their sale, assignment or transfer for
one year following the date of this prospectus without the prior
written consent of the representative of the underwriters.

Following the closing of this offering, our authorized capital
stock will consist
of shares
of common stock, $0.01 par value per share,
and shares
of undesignated preferred stock, $0.01 par value per share.

The following description of our securities and provisions of
our restated certificate of incorporation and amended and
restated by-laws are summaries and are qualified by reference to
the restated certificate of incorporation and amended and
restated by-laws that will become effective following the
effectiveness of the registration statement of which this
prospectus is a part. Copies of these documents have been filed
with the SEC as exhibits to our registration statement, of which
this prospectus forms a part. The descriptions of the common
stock and preferred stock reflect changes to our capital
structure that will occur following the effectiveness of the
registration statement of which this prospectus is a part.

Units

Each unit consists of one share of common stock and one
redeemable warrant to purchase one share of common stock.
Initially, only the units will trade. The common stock and the
warrants included in the units will begin trading separately on
the 30th calendar day following the date of this prospectus
or the first trading day thereafter if the 30th calendar
day is a weekend or a legal holiday. Once separate trading in
the common stock and warrants begins, trading in the units will
cease, and the units will be delisted.

At the closing of this offering, we will deliver only unit
certificates. An investor may request physical delivery of the
certificate and may immediately request that the unit
certificate be exchanged for common stock and warrant
certificates. If the investor does so before the common stock
and warrant trade separately, trades based on the common stock
and warrant certificates will not clear until trading in those
securities commences.

Common
Stock

As
of ,
there
were shares
of our common stock outstanding, held of record
by stockholders, assuming the conversion
of all outstanding shares of preferred stock. Immediately after
this offering, we will
have shares
of our common stock outstanding, including the common stock
included in the units. If the over-allotment option is exercised
in full, we will
have shares
of our common stock outstanding.

The holders of our common stock are generally entitled to one
vote for each share held on all matters submitted to a vote of
the stockholders and do not have any cumulative voting rights.
Holders of our common stock are entitled to receive
proportionally any dividends declared by our board of directors
out of funds legally available therefor, subject to any
preferential dividend or other rights of any then outstanding
preferred stock.

In the event of our liquidation or dissolution, holders of our
common stock are entitled to share ratably in all assets
remaining after payment of all debts and other liabilities,
subject to the prior rights of any then outstanding preferred
stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. All outstanding
shares of our common stock are validly issued, fully paid and
nonassessable. The shares included in the unit to be issued by
us in this offering will be, when the units are issued and paid
for as set forth in this prospectus, validly issued, fully paid
and nonassessable.

The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock
that we may designate and issue in the future.

General. The warrants included in the units
being issued in this offering may be exercised at any time after
they become separately tradeable, and ending on the fifth
anniversary of the date of this prospectus. Each warrant
entitles the holder to purchase one share of common stock at an
exercise price of $ per share
(150% of the initial public offering price of the units). This
exercise price will be adjusted if specific events, summarized
below, occur. A holder of a warrant will not be deemed a holder
of the underlying stock for any purpose until the warrant is
exercised.

Redemption. Beginning six months after the
date of this prospectus, we will have the right to redeem the
warrants at a price of $0.25 per warrant at any time after the
closing price for our common stock, as reported on the principal
exchange on which our common stock trades, was at or above 200%
of the initial public offering price of the units for any five
consecutive trading days. We will send a written notice of
redemption by first class mail to holders of the warrants at
their last known addresses appearing on the registration records
maintained by the warrant agent. No other form of notice or
publication or otherwise will be required. If we call the
warrants for redemption, the holders of the warrants will then
have to decide whether to sell the warrants, exercise them
before the close of business on the business day preceding the
specified redemption date or hold them for redemption. If the
warrants are not covered by a current registration statement or
are not qualified for sale under the laws of the state in which
holders reside, warrantholders may not be able to exercise them.

Exercise. To exercise a warrant, the holder
must deliver to our warrant agent the warrant certificate on or
before the expiration date or the redemption date, as
applicable, with the form on the reverse side of the certificate
executed as indicated, accompanied by payment of the full
exercise price for the number of warrants being exercised.
Fractional shares of common stock will not be issued upon
exercise of the warrants.

In order for you to exercise the warrants, the shares of common
stock underlying them must be covered by an effective
registration statement and, if the issuance of shares is not
exempt under state securities laws, must be properly registered
with state securities regulators. At present, we plan to have a
registration statement current when the warrants are redeemed
and, to the extent that the underlying shares do not qualify for
one or more exemptions under state securities laws, we intend to
use our best efforts to register the shares with the relevant
authorities. However, we cannot assure you that state exemptions
will be available, the state authorities will permit us to
register the underlying shares, or that an effective
registration statement will be in place at the relevant time(s).

If the warrants are not exercisable at their expiration date,
the expiration date will be extended for 30 days following
notice to the holders of the warrants that the warrants are
again exercisable. If you cannot exercise the warrants, and the
securities underlying the warrants are listed on a securities
exchange or there are three independent market makers for the
underlying securities, we may, but are not required to, settle
the warrants for a price equal to the difference between the
closing price of the underlying securities and the exercise
price of the warrants. These factors may have an adverse effect
on the demand for the warrants and the prices that can be
obtained from reselling them.

Adjustments of exercise price. The exercise
price of the warrants will be adjusted if we declare any stock
dividend to stockholders or effect any split or share
combination with regard to our common stock. If we effect any
stock split or stock combination with regard to our common
stock, the exercise price in effect immediately before the stock
split or combination will be proportionately reduced or
increased, as the case may be. Any adjustment of the exercise
price will also result in an adjustment of the number of shares
underlying a warrant or, if we elect, an adjustment of the
number of warrants outstanding.

Preferred
Stock

Under the terms of our restated certificate of incorporation,
our board of directors is authorized to issue shares of
preferred stock in one or more series without stockholder
approval. Our board of directors has the discretion to determine
the rights, preferences, privileges and restrictions, including
voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
preferred stock,

any or all of which may be greater than or senior to the rights
of the common stock. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and
reduce the likelihood that such holders will receive dividend
payments or payments on liquidation. In certain circumstances,
an issuance of preferred stock could have the effect of
decreasing the market price of our common stock.

Authorizing our board of directors to issue preferred stock and
determine its rights and preferences has the effect of
eliminating delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire,
or could discourage a third party from seeking to acquire, a
majority of our outstanding voting stock. Following the
effectiveness of the registration statement of which this
prospectus is a part, there will be no shares of preferred stock
outstanding, and we have no present plans to issue any shares of
preferred stock.

Options
and Warrants

As of June 30, 2007, options to purchase
2,582,326 shares of common stock at a weighted average
exercise price of $0.60 per share were outstanding. As of
June 30, 2007, warrants to purchase 138,341 shares of
common stock at a weighted average exercise price of $1.00 per
share were outstanding.

Registration
Rights

We have entered into an amended and restated registration
agreement with the holders of shares of our common stock and
warrants to purchase our common stock issuable upon conversion
of our preferred stock. After the closing of this offering,
holders of a total
of shares
of our outstanding common stock and holders of warrants to
purchase shares
of our common stock will have the right to require us to
register these shares under the Securities Act under specific
circumstances, except that the warrantholders will not have the
demand registration rights described below. After registration
pursuant to these rights, these shares will become freely
tradable without restriction under the Securities Act. The
following description of the terms of the amended and restated
registration agreement is intended as a summary only and is
qualified in its entirety by reference to the amended and
restated registration agreement filed as an exhibit to the
registration statement of which this prospectus forms a part.

Demand Registration Rights. At any time from
and after the earlier of January 12, 2008 and the effective
date of the registration statement of which this prospectus
forms a part, the holders of a majority of the registrable
shares or the holders of
662/3%
of the shares of common stock acquired upon conversion of our
Series C preferred stock may request that we register under
the Securities Act all or a portion of their shares, but not
less that an aggregate
of shares,
on
Form S-1
or any similar long-form registration statement. In addition,
the holders will have the right to request that we register on
Form S-3
or any similar short-form registration statement all or a
portion of the registrable shares held by them having an
aggregate offering price of at least $1,000,000 based on the
then-current market price of our common stock. We are required
to effect no more than one registration statement on
Form S-1
or any similar long-form registration statement for the holders
of a majority of the registrable shares and no more than one
registration statement for the holders of
662/3%
of the shares of common stock acquired upon conversion of our
Series C preferred stock. We are required to effect an
unlimited number of registrations on
Form S-3
or any similar short-form registration statement. We are not
obligated to effect a demand registration under the amended and
restated registration agreement within 120 days after the
effective date of a previous demand registration.

Piggyback Registration Rights. If at any time
we propose to register shares of our common stock under the
Securities Act, other in this offering or on a registration
statement on
Form S-4
or S-8, the
holders of registrable shares will be entitled to notice of the
registration and, subject to certain exceptions, have the right
to require us to register all or a portion of the registrable
shares then held by them.

In the event that any registration in which the holders of
registrable shares participate pursuant to the amended and
restated registration agreement is an underwritten public
offering, the number of registrable shares to be included may,
in specified circumstances, be limited due to market conditions.

Limitations. Holders of registrable securities
have agreed not to request any demand registration or to
publicly sell any of our securities within seven days prior to
or within 120 days after the effective date of any
underwritten demand or piggyback registration in which
registrable shares are included, unless the underwriter
otherwise agrees. We have also agreed not to publicly sell our
securities within seven days prior to or within 180 days
after the effective date of any underwritten demand or piggyback
registration in which registrable shares are included, unless
the underwriter otherwise agrees. We are not obligated to effect
a demand or piggyback registration within one year after the
effective date of the registration statement of which this
prospectus forms a part.

Expenses and Indemnification. Pursuant to the
amended and restated registration agreement, we are required to
pay all registration expenses and indemnify each participating
holder with respect to each registration of registrable shares
that is effected.

Future Grants of Registration Rights. Without
the consent of at least a majority of the then outstanding
registrable securities held by parties to the amended and
restated registration agreement, we may not grant further
registration rights which would be on equal or more favorable
terms than the registration rights provided for in the amended
and restated registration agreement.

Termination. The registration rights granted
under the amended and restated registration agreement will
terminate upon the later of five years following the closing of
this offering and one year after the holder of the registration
rights is able to sell its registrable shares pursuant to
Rule 144(k).

Anti-Takeover
Effects of Delaware Law and Our Restated Certificate of
Incorporation and Amended and Restated By-Laws

Delaware law and our restated certificate of incorporation and
amended and restated by-laws contain provisions that could have
the effect of delaying, deferring or discouraging another party
from acquiring control of us. These provisions, which are
summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of
us to first negotiate with our board of directors.

Staggered
Board; Removal of Directors

Our restated certificate of incorporation and amended and
restated by-laws divide our board of directors into three
classes with staggered three-year terms. In addition, a director
may be removed only for cause and only by the affirmative vote
of the holders of at least
662/3%
of the voting power of our outstanding common stock. Any vacancy
on our board of directors, including a vacancy resulting from an
enlargement of our board of directors, may be filled only by
vote of a majority of our directors then in office.

The classification of our board of directors and the limitations
on the removal of directors and filling of vacancies could make
it more difficult for a third party to acquire, or discourage a
third party from seeking to acquire, control of our company.

Stockholder
Action by Written Consent; Special Meetings

Our restated certificate of incorporation provides that any
action required or permitted to be taken by our stockholders
must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing
by such holders. Our restated certificate of incorporation and
amended and restated by-laws also provide that, except as
otherwise required by law, special meetings of our stockholders
can only be called by our chairman of the board, our chief
executive officer or president or our board of directors.

Advance
Notice Requirements for Stockholder Proposals

Our amended and restated by-laws establish an advance notice
procedure for stockholder proposals to be brought before an
annual meeting of stockholders, including proposed nominations
of persons for election to the board of directors. Stockholders
at an annual meeting may only consider proposals or nominations

specified in the notice of meeting or brought before the meeting
by or at the direction of the board of directors or by a
stockholder of record on the record date for the meeting, who is
entitled to vote at the meeting and who has delivered timely
written notice in proper form to our secretary of the
stockholders intention to bring such business before the
meeting. These provisions could have the effect of delaying
until the next stockholder meeting stockholder actions that are
favored by the holders of a majority of our outstanding voting
securities.

Delaware
Business Combination Statute

We are subject to Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203
prevents a publicly held Delaware corporation from engaging in a
business combination with any interested
stockholder for three years following the date that the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or unless the business combination is approved in a
prescribed manner. A business combination includes,
among other things, a merger or consolidation involving us and
the interested stockholder and the sale of more than
10% of our assets. In general, an interested
stockholder is any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or
person affiliated with or controlling or controlled by such
entity or person.

Amendment
of Certificate of Incorporation and By-Laws

The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporations certificate
of incorporation or by-laws, unless a corporations
certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Our amended and restated by-laws
may be amended or repealed by a majority vote of our board of
directors or by the affirmative vote of the holders of at least
662/3%
of the votes which all our stockholders would be entitled to
cast in any election of directors. In addition, the affirmative
vote of the holders of at least
662/3%
of the votes which all our stockholders would be entitled to
cast in any election of directors is required to amend or repeal
or to adopt any provisions inconsistent with any of the
provisions of our restated certificate of incorporation
described above under  Staggered Board; Removal
of Directors and  Stockholder Action by
Written Consent; Special Meetings.

Limitation
of Liability and Indemnification of Officers and
Directors

Our restated certificate of incorporation limits the personal
liability of directors for breach of fiduciary duty to the
maximum extent permitted by the Delaware General Corporation
Law. Our restated certificate of incorporation provides that no
director will have personal liability to us or to our
stockholders for monetary damages for breach of fiduciary duty
or other duty as a director. However, these provisions do not
eliminate or limit the liability of any of our directors:



for any breach of their duty of loyalty to us or our
stockholders;



for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;



for voting or assenting to unlawful payments of dividends or
other distributions; or



for any transaction from which the director derived an improper
personal benefit.

Any amendment to, or repeal of, these provisions will not
eliminate or reduce the effect of these provisions in respect of
any act or failure to act, or any cause of action, suit or claim
that would accrue or arise prior to any amendment or repeal or
adoption of an inconsistent provision. If the Delaware General
Corporation Law is amended to provide for further limitations on
the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to
the greatest extent permitted by the Delaware General
Corporation Law.

In addition, our restated certificate of incorporation provides
that we must indemnify our directors and officers and we must
advance expenses, including attorneys fees, to our
directors and officers in connection with legal proceedings,
subject to limited exceptions.

Authorized
but Unissued Shares

The authorized but unissued shares of common stock and preferred
stock are available for future issuance without stockholder
approval, subject to any limitations imposed by the listing
standards of the NASDAQ Capital Market. These additional shares
may be used for a variety of corporate finance transactions,
acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and
preferred stock could make it more difficult or discourage an
attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.

Transfer
Agent, Warrant Agent and Registrar

The transfer agent and registrar for our common stock and the
warrant agent for the warrants will
be ,
located
in , .

NASDAQ
Capital Market

We have applied to list the units, common stock and warrants on
the NASDAQ Capital Market under the symbols NITRU,
NITR and NITRW, respectively.

After this offering is completed, we expect to
have shares
of common stock outstanding. This number assumes no exercise of
the underwriters over-allotment option, the warrants
included in the units offered under this prospectus, the
underwriters warrants or any other outstanding options and
warrants. We expect to
have shares
of common stock outstanding if the underwriters
over-allotment is exercised in full. Of these shares,
the shares
of common stock issued as part of the units sold in this
offering
( shares
if the underwriters over-allotment is exercised in full)
will be freely tradeable without restrictions or further
registration under the Securities Act, except that any shares
purchased by our affiliates, as that term is defined
under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 under the
Securities Act.
The shares
of common stock underlying the warrants that are part of the
units sold in this offering
( shares
of common stock underlying the warrants if the
underwriters over-allotment is exercised in full) will
also be freely tradeable after exercise of the warrants, except
for shares held by our affiliates.

Outstanding
Restricted Stock

The
remaining
outstanding shares of common stock will be restricted securities
within the meaning of Rule 144 and may not be sold in the
absence of registration under the Securities Act unless an
exemption from registration is available, including the
exemption from registration offered by Rule 144. The
holders
of
of these shares have agreed not to sell or otherwise dispose of
any of their shares of common stock for a period of one year
after the date of this prospectus, without the prior written
consent of the representative of the underwriters, subject to
certain limited exceptions. In addition, the holders of an
additional shares
have agreed not to sell or otherwise dispose of any of their
shares of common stock for a period of 180 days after the
effectiveness of the registration statement of which this
prospectus is a part. After the expiration of the
lock-up
periods, all of the outstanding restricted shares may be sold in
the public market pursuant to Rule 144.

Without taking into account the
lock-up
agreements, shares
of common stock would be eligible for sale under Rule 144
90 days after the closing of this offering. The balance of
the restricted shares would be eligible for sale under
Rule 144 on approximately the following schedule:



shares
on ,
2008; and



.

In general, under Rule 144, as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned restricted shares for at least
one year, including a person who may be deemed to be our
affiliate, may sell within any three-month period a number of
shares of common stock that does not exceed a specified maximum
number of shares. This maximum is equal to the greater of 1% of
the then outstanding shares of our common stock or the average
weekly trading volume in the common stock during the four
calendar weeks immediately preceding the sale. Sales under
Rule 144 are also subject to restrictions relating to
manner of sale, notice and availability of current public
information about us. In addition, under Rule 144(k) of the
Securities Act, a person who is not our affiliate, has not been
an affiliate of ours within three months prior to the sale and
has beneficially owned shares for at least two years would be
entitled to sell such shares immediately without regard to
volume limitations, manner of sale provisions, notice or other
requirements of Rule 144.

In general, under Rule 701 of the Securities Act, any of
our employees, directors, consultants or advisors who purchased
shares from us in connection with a qualified compensatory stock
plan or other written agreement is eligible to resell those
shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with the
various restrictions, including the holding period, contained in
Rule 144. Subject to the one year or
180-daylock-up
period described above,
approximately shares
of our common stock will be eligible for sale in accordance with
Rule 701.

As of June 30, 2007, we had outstanding options to purchase
a total of 2,582,326 shares of common stock under our stock
incentive plans. We may not grant any more options under our
1999 stock plan or 2000 stock plan, but we can grant options
covering an additional 773,382 shares of common stock under
our 2005 stock plan. We intend to file a registration statement
under the Securities Act to register all shares of common stock
issued, issuable or reserved for issuance under our stock
incentive plans. This registration statement is expected to be
filed as soon as practicable after the closing of this offering
and will automatically become effective upon filing. Following
this filing, shares exercisable pursuant to vested options that
are registered under this registration statement will, subject
to the
lock-up
agreements and market standoff provisions described above and
Rule 144 volume limitations applicable to our affiliates,
be available for sale in the open market.

Warrants

As of June 30, 2007, we had outstanding warrants to
purchase 138,341 shares of common stock and holders of
warrants to purchase 87,785 of these shares of common stock have
registration rights, which are described above under
Description of Securities  Registration
Rights.

Underwriters
Warrants

In connection with this offering, we have agreed to issue to the
underwriters warrants to
purchase
units. The underwriters warrants will be exercisable for
units at any time beginning one year after the date of this
prospectus until the fifth anniversary of the date of this
prospectus. However, neither the underwriters warrants nor
the underlying securities may be sold, transferred, assigned,
pledged or hypothecated, or be the subject of any hedging, short
sale, derivative, put or call transaction that would result in
the effective economic disposition of the securities by any
person for a period of one year immediately following the date
of this prospectus, except as otherwise permitted by NASD
Marketplace Rule 2710(g)(2). We will cause the registration
statement of which this prospectus is a part to remain effective
until the earlier of the time that the underwriters
warrants have been fully exercised and the date which is five
years after the date of this prospectus or we will file a new
registration statement covering the exercise and resale of those
securities. The common stock and warrants issued to the
underwriters upon exercise of the underwriters warrants
will be freely tradable.

Paulson Investment Company, Inc. is acting as the representative
of the underwriters. We and Paulson have entered into an
underwriting agreement with respect to the units being offered.
In connection with this offering and subject to certain
conditions, the underwriters have severally agreed to purchase,
and we have agreed to sell, the number of units set forth below.

Number

Underwriters

of Units

Paulson Investment Company, Inc.

Total

The underwriting agreement provides that the underwriters are
obligated to purchase all of the units offered by this
prospectus, other than those covered by the over-allotment
option, if any units are purchased. The underwriting agreement
also provides that the obligations of the several underwriters
to pay for and accept delivery of the units is subject to the
approval of certain legal matters by counsel and certain other
conditions. These conditions include, among other things, the
requirements that no stop order suspending the effectiveness of
the registration statement be in effect and that no proceedings
for this purpose have been instituted or threatened by the SEC.

The representative of the underwriters has advised us that the
underwriters propose to offer our units to the public initially
at the offering price set forth on the cover page of this
prospectus and to selected dealers at that price less a
concession of not more than $ per
unit. The underwriters and selected dealers may reallow a
concession to other dealers, including the underwriters, of not
more than $ per unit. After
completion of the public offering of the units, the offering
price, the concessions to selected dealers and the reallowance
to their dealers may be changed by the underwriters.

The underwriters have informed us that they do not expect to
confirm sales of our units offered by this prospectus on a
discretionary basis.

Over-Allotment
Option

Pursuant to the underwriting agreement, we have granted the
underwriters an option, exercisable for 45 days from the
date of this prospectus, to purchase up to an
additional
units on the same terms as the other units being purchased by
the underwriters from us. The underwriters may exercise the
option solely to cover over-allotments, if any, in the sale of
the units that the underwriters have agreed to purchase. If the
over-allotment option is exercised in full, the total public
offering price, underwriting discount and proceeds to us before
offering expenses will be $ ,
$ and
$ , respectively.

Stabilization

The rules of the SEC generally prohibit the underwriters from
trading in our securities on the open market during this
offering. However, the underwriters are allowed to engage in
some open market transactions and other activities during this
offering that may cause the market price of our securities to be
above or below that which would otherwise prevail in the open
market. These activities may include stabilization, short sales
and over-allotments, syndicate covering transactions and penalty
bids.



Stabilizing transactions consist of bids or purchases made by
the representative of the underwriters for the purpose of
preventing or slowing a decline in the market price of our
securities while this offering is in progress.



Short sales and over-allotments occur when the representative of
the underwriters, on behalf of the underwriting syndicate, sells
more of our units than it purchases from us in this offering. In
order to cover the resulting short position, the representative
of the underwriters may exercise the over-allotment option
described above or may engage in syndicate covering
transactions. There is no contractual limit on the size of any
syndicate covering transaction. The underwriters will deliver a
prospectus in connection with any such short sales. Purchasers
of units sold short by the underwriters are entitled to

the same remedies under the federal securities laws as any other
purchaser of units covered by the registration statement.



Syndicate covering transactions are bids for or purchases of our
securities on the open market by the representative of the
underwriters on behalf of the underwriters in order to reduce a
short position incurred by the representative of the
underwriters on behalf of the underwriters.



A penalty bid is an arrangement permitting the representative of
the underwriters to reclaim the selling concession that would
otherwise accrue to an underwriter if the common stock
originally sold by the underwriter was later repurchased by the
representative of the underwriters and therefore was not
effectively sold to the public by such underwriter.

If the underwriters commence these activities, they may
discontinue them at any time without notice. The underwriters
may carry out these transactions on the NASDAQ Capital Market or
otherwise.

Indemnification

The underwriting agreement provides for indemnification between
us and the underwriters against specified liabilities, including
liabilities under the Securities Act, and for contribution by us
and the underwriters to payments that may be required to be made
with respect to those liabilities. We have been advised that, in
the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.

Underwriters
Compensation

We have agreed to sell the units to the underwriters at the
initial offering price of $ per
unit, which represents the initial public offering price of the
units set forth on the cover page of this prospectus less an 8%
underwriting discount. The underwriting agreement also provides
that Paulson Investment Company, Inc., as the representative of
the underwriters, for itself and not on behalf of the
underwriters, will be paid a nonaccountable expense allowance
equal to 2% of the gross proceeds from the sale of the units
offered by this prospectus, excluding any units purchased as a
result of exercise of the over-allotment option. We have paid
Paulson Investment Company, Inc. a $35,000 advance against the
nonaccountable expense allowance.

Upon the closing of this offering, we will issue to the
underwriters warrants to purchase up to an aggregate
of
units, for a price per unit equal to 120% of the initial public
offering price of the units. The underwriters warrants
will be exercisable for units at any time beginning one year
after the date of this prospectus and will expire on the fifth
anniversary of date of this prospectus. Neither the
underwriters warrants nor the underlying securities may be
sold, transferred, assigned, pledged or hypothecated, or be the
subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic
disposition of the securities by any person for a period of one
year immediately following the date of this prospectus, except
as otherwise permitted by NASD Marketplace Rule 2710(g)(2).

The holders of the underwriters warrants will have, in
that capacity, no voting, dividend or other stockholder rights.
Any profit realized on the sale of the units issuable upon
exercise of these warrants may be deemed to be additional
underwriting compensation. The securities underlying these
warrants are being registered pursuant to the registration
statement of which this prospectus is a part.

The following table summarizes the underwriting discount we will
pay to the underwriters and the non-accountable expense
allowance we will pay to the representative of the underwriters.
These amounts are shown assuming both no exercise and full
exercise of the underwriters over-allotment option.

Our officers, directors and certain stockholders have executed
lock-up agreements with Paulson, which provide that, without
Paulsons written consent, for a period of one year from
the date of this prospectus, they will not sell, contract to
sell, grant any option for the sale or otherwise dispose of any
of our equity securities, or any securities convertible into or
exercisable or exchangeable for our equity securities, other
than pursuant to certain exceptions as set forth in the lock-up
agreements.

Determination
of Offering Price

The initial public offering price of the units offered by this
prospectus and the exercise price of the public warrants have
been determined by negotiation between us and the underwriters.
Among the factors considered in determining the initial public
offering price of the units and the exercise price of the
warrants were:



our history and our prospects;



the industry in which we operate;



the status and development prospects for our products;



our past and present operating results;



the previous experience of our executive officers; and



the general condition of the securities markets at the time of
this offering.

The offering price stated on the cover page of this prospectus
should not be considered an indication of the actual value of
the units. That price is subject to change as a result of market
conditions and other factors, and we cannot assure you that the
units, or the common stock and warrants contained in the units,
can be resold at or above the initial public offering price.

The validity of the common stock being offered will be passed
upon for us by Wilmer Cutler Pickering Hale and Dorr LLP,
Boston, Massachusetts. Morse, Zelnick, Rose & Lander,
LLP, New York, New York, will pass upon certain matters for the
underwriters.

Carlin, Charron & Rosen, LLP, an independent
registered public accounting firm, has audited our financial
statements as of and for the fiscal year ended December 31,
2006 and for the fiscal year ended December 31, 2005 as set
forth in their report. We have included these financial
statements in this prospectus in reliance on the report of
Carlin, Charron & Rosen, LLP, given on their authority
as experts in accounting and auditing. We have also appointed
Carlin, Charron & Rosen, LLP as our independent
registered public accounting firm for the fiscal year ending
December 31, 2007.

Mirus Capital Advisors, Inc., an independent valuation firm, has
performed valuations of the fair market value of our common
stock as of January 1, 2007 and July 1, 2007, for the
sole purpose of satisfying the requirements of
Section 409A, and subject to the limitations and
disclaimers contained in its reports to us. Mirus Capital
Advisors, Inc. has consented to the references to its valuation
reports in this prospectus.

We have filed with the SEC a registration statement on
Form SB-2
under the Securities Act with respect to the units to be sold in
the offering. This prospectus, which constitutes part of the
registration statement, does not include all of the information
contained in the registration statement and the exhibits,
schedules and amendments to the registration statement. Some
items are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to us and our
common stock, we refer you to the registration statement and to
the exhibits and schedules to the registration statement filed
as part of the registration statement. Statements contained in
this prospectus about the contents of any contract or any other
document filed as an exhibit are not necessarily complete, and,
and in each instance, we refer you to the copy of the contract
or other documents filed as an exhibit to the registration
statement. Each of these statements is qualified in all respects
by this reference.

You may read and copy the registration statement of which this
prospectus is a part at the SECs public reference room,
which is located at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You can request
copies of the registration statement by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330
for more information about the operation of the SECs
public reference room. In addition, the SEC maintains an
Internet website, which is located at
http://www.sec.gov,
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC. You may access the registration statement of which
this prospectus is a part at the SECs Internet website.

Upon completion of the offering, we will become subject to the
full informational and periodic reporting requirements of the
Exchange Act. We will fulfill our obligations with respect to
such requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders
with annual reports containing financial statements certified by
an independent registered public accounting firm. We also
maintain a website at www.nitrosecurity.com. Our website
is not a part of this prospectus.

The accompanying unaudited condensed financial statements have
not been audited, in accordance with accounting principles
generally accepted in the United States of America
(GAAP) for interim financial information, pursuant
to Article 10 of
Regulation S-X
promulgated under the Securities Exchange Act of 1934, as
amended. Accordingly, they do not include all of the information
and disclosures required by GAAP for complete financial
statements. In the opinion of management, all adjustments
consisting of normal recurring adjustments necessary for a fair
presentation of the condensed financial statements have been
included for the interim periods presented. The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates. Accordingly, these condensed financial statements
should be read in conjunction with the financial statements as
of December 31, 2006 and for the fiscal years ended
December 31, 2006 and 2005 contained in NitroSecurity,
Inc.s (the Companys) registration
statement on
Form SB-2.
Operating results for the interim period are not necessarily
indicative of the results that may be expected for the entire
fiscal year.

Cash and cash equivalents were $498,577 at March 31, 2007.

The Company continues to experience net losses and had an
accumulated deficit of approximately $34 million at
March 31, 2007. The report of the Companys
independent registered public accounting firm issued in
connection with the Companys financial statements as of
December 31, 2006 and for the fiscal years ended
December 31, 2006 and 2005 contained an explanatory
paragraph regarding substantial doubt about the Companys
ability to continue as a going concern.

The Company will need to raise additional capital to fund its
long-term operations and to generate positive cash from
operations. Subsequent to December 31, 2006, the Company
raised additional equity financing through a private placement
and additional debt financing through a secured debt facility
and convertible promissory notes. (Note 7)

2.

Inventory

The Companys inventory consists of finished hardware
products and related components that are manufactured by a
third-party vendor. The carrying value of the Companys
inventory approximates the specific identification method using
vendor cost. The inventory is valued at the lower of purchased
cost or market, net of appropriate reserves for excess
quantities and obsolescence.

3.

Net Loss
Per Share

Net loss per share is based on the weighted average number of
common shares outstanding in each period presented. Diluted
earnings per share (EPS) is similar to basic EPS,
except that the weighted average common shares outstanding is
increased to include the additional common shares that would
have been outstanding if the potential dilutive common shares,
consisting of shares of those stock options for which market
price exceeds exercise price, had been issued. Such common
equivalent shares are excluded from the calculation of diluted
EPS in loss years, as the impact is anti-dilutive. Therefore,
there was no difference between basic and diluted EPS for each
period presented. The number of options and warrants excluded
from the calculation was 2,851,180 and 577,229 as of
March 31, 2007 and 2006, respectively.

Weighted average number of common
and common equivalent shares outstanding  basic and
diluted

772,583

772,583

4.

Debt

Convertible
Promissory Notes

In November and December 2006, the Company borrowed $1,000,000
under convertible promissory note agreements (the 2006
Notes) with existing investors of the Company. The 2006
Notes have recourse to the general unsecured assets of the
Company and bear interest at a rate of 8% per annum. Principal
and accrued but unpaid interest is due and payable on
December 31, 2007 unless earlier converted into equity
pursuant to the terms of the 2006 Notes. The 2006 Notes and
related interest are convertible into Series C preferred
stock at 85% of the applicable conversion price. As of
March 31, 2007, $1,000,000 was outstanding under the 2006
Notes. During the three months ended March 31, 2007,
interest expense of $20,000 was accrued.

In January and February 2007, the Company borrowed an additional
$1,000,000 under convertible promissory note agreements (the
2007 Notes) with existing investors of the Company.
The 2007 Notes had recourse to the general unsecured assets of
the Company and bore interest at a rate of 8% per annum.
Principal and accrued but unpaid interest was due and payable on
December 31, 2007 unless earlier converted into equity
pursuant to the terms of the 2007 Notes. The 2007 Notes and
related interest were convertible into Series C preferred
stock at 85% of the applicable conversion price. As of
March 31, 2007, $1,000,000 was outstanding under the 2007
Notes. During the three months ended March 31, 2007,
interest expense of $9,699 was accrued.

5.

Stock
Option Plans

Share-based compensation expense recognized in the
Companys unaudited statements of operations for the three
months ended March 31, 2007 and 2006 was $158,106 and
$33,304, respectively.

The following table summarizes the activity under the
Companys stock option plans for the quarter ended
March 31, 2007:

The weighted average fair value of stock options granted for the
three months ended March 31, 2007 and 2006, calculated
using the Black-Scholes option-pricing model, was approximately
$0.63 and $0.45, respectively.

The fair value of each stock option granted during the three
months ended March 31, 2007 and 2006 was estimated on the
date of grant using the Black-Scholes option pricing model and
the following assumptions:

2007

2006

Risk-free interest rate

5.08%

4.70%

Expected dividend yield

0%

0%

Expected term

6.25 yrs

6.25 yrs

Expected volatility

73.54%

73.54%

Value of common stock

$

0.85

$

0.60

The following table summarizes information about stock options
outstanding at March 31, 2007:

Options Outstanding

Options Exercisable

Weighted

Weighted

Average

Average

Remaining

Weighted

Exercise

Contractual

Average

Number of

Price Per

Range of

Number

Life

Exercise

Shares

Share

Exercise Price

Outstanding

(In Years)

Price

Exercisable

Exercisable

$0.40

20,363

0.79

$

0.40

20,363

$

0.40

0.60

2,764,256

8.41

$

0.60

1,140,479

$

0.60

2,784,619

8.35

$

0.60

1,160,842

$

0.60

The aggregate intrinsic value of the total options outstanding
and the vested and exercisable options at March 31, 2007
was $700,227 and $294,283, respectively. The aggregate intrinsic
value of both the total options outstanding and the vested and
exercisable options at March 31, 2006 was $4,073.

The following table summarizes the status of the Companys
unvested equity awards at March 31, 2007:

Number of

Weighted Average

Shares

Fair Value

Balance as of December 31,
2006

2,347,091

$

0.43

Granted

96,750

0.63

Vested

(734,749

)

0.44

Forfeited

(85,315

)

0.25

Balance as March 31, 2007

1,623,777

$

0.42

As of March 31, 2007, there was $833,977 of unrecognized
compensation cost related to unvested share-based compensation
granted by the Company. That cost is expected to be recognized
over a weighted average period of 1.6 years.

No stock options were exercised during the three months ended
March 31, 2007.

accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. FIN 48 prescribes
a recognition and measurement method of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transactions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted the
provisions of FIN 48 on January 1, 2007. The Company
did not have any unrecognized tax benefits and there was no
effect on its financial condition or results of operations as a
result of implementing FIN 48.

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which is applicable for
fiscal years beginning after November 15, 2007. SFAS
No. 157 defines fair value, establishes a framework for
measuring fair value in GAAP and expands disclosures about fair
value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant
measurement attribute. Although SFAS No. 157 does not
require any new fair value measurements, its application may,
for some entities, change current practices related to the
definition of fair value, the methods used to measure fair value
and the expanded disclosures about fair value measurements. The
Company is currently evaluating the impact of the adoption of
SFAS No. 157 and has not yet determined its impact on
the financial statements.

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 creates a fair
value option under which an entity may elect to record
certain financial assets or liabilities at fair value upon their
initial recognition. The Company would recognize subsequent
changes in fair value in earnings as those changes occur. The
Company would make the election of the fair value option on a
contract-by-contract basis, supported by concurrent
documentation or a
pre-existing
documented policy. SFAS No. 159 requires an entity to
separately disclose the fair value of these items on the balance
sheet or in the footnotes to the financial statements and to
provide information that would allow the financial statement
user to understand the impact on earnings from changes in the
fair value. SFAS No. 159 is effective for the Company
beginning with the fiscal year ending December 31, 2008.
The Company is currently evaluating the impact that the adoption
of SFAS No. 159 may have on its financial statements.

7.

Subsequent
Events

Bridge
Loans

In April 2007, the 2007 Notes and related interest were
converted into 853,042 shares of Series C preferred
stock.

Private
Placement

In April and May 2007, the Company closed a private placement
under which $1,452,515 of cash was received, net of expenses of
$265,552, and 1,227,191 shares of Series C preferred
stock were issued.

Secured
Debt Facility and Convertible Notes

In July and August 2007, the Company borrowed $2,000,000
pursuant to a secured debt facility, which has a term of three
years. In addition, the Company borrowed an additional
$2,000,000 under convertible promissory note agreements with
existing investors of the Company.

We have audited the accompanying balance sheet of NitroSecurity,
Inc. (the Company) as of December 31, 2006, and
the related statements of operations, statements of changes in
mandatory redeemable preferred stock and stockholders
deficit and cash flows for the years ended December 31,
2006 and 2005. These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 2006, and the results of
its operations and its cash flows for the years ended
December 31, 2006 and 2005 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations, has a net
capital deficiency and a net working capital deficiency which
raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans with regard
to these matters are also described in Note 1. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.